leach & melicher - ch 03 organizing and financing a new venture - ef
TRANSCRIPT
![Page 1: Leach & Melicher - Ch 03 Organizing and Financing a New Venture - Ef](https://reader036.vdocument.in/reader036/viewer/2022062305/5695cfd31a28ab9b028fb766/html5/thumbnails/1.jpg)
Chapter 3ORGANIZING AND FINANCING A NEW VENTURE
1
© 2012 South-Western Cengage Learning
ENTREPRENEURIAL FINANCE Leach & Melicher
![Page 2: Leach & Melicher - Ch 03 Organizing and Financing a New Venture - Ef](https://reader036.vdocument.in/reader036/viewer/2022062305/5695cfd31a28ab9b028fb766/html5/thumbnails/2.jpg)
Chapter 3: Learning Objectives Describe the
proprietorship, partnership, and corporate forms of business
Identify the differentiating characteristics of a limited liability company (LLC)
Describe the benefits, risks, and basic tax aspects of various organizational forms
Discuss the use of patents and trade secrets to protect intellectual property
Discuss the use of trademarks and copyrights to protect intellectual property
Describe how confidential disclosure agreements and employment contracts are used to protect intellectual property rights
Explain how financing is obtained via financial bootstrapping and through business angels
Describe first-round financing sources
2
![Page 3: Leach & Melicher - Ch 03 Organizing and Financing a New Venture - Ef](https://reader036.vdocument.in/reader036/viewer/2022062305/5695cfd31a28ab9b028fb766/html5/thumbnails/3.jpg)
Forms of Business Organization Sole Proprietorships Partnerships
General Limited
Corporations C corporations S (or Subchapter S) corporations
Limited Liability Companies (LLCs)
3
![Page 4: Leach & Melicher - Ch 03 Organizing and Financing a New Venture - Ef](https://reader036.vdocument.in/reader036/viewer/2022062305/5695cfd31a28ab9b028fb766/html5/thumbnails/4.jpg)
Proprietorships
Proprietorship:business venture owned by an individual who is personally liable for the venture’s liabilities
Unlimited liability:personal obligation to pay a venture’s liabilities not covered by the venture’s assets
4
![Page 5: Leach & Melicher - Ch 03 Organizing and Financing a New Venture - Ef](https://reader036.vdocument.in/reader036/viewer/2022062305/5695cfd31a28ab9b028fb766/html5/thumbnails/5.jpg)
Partnerships
Partnership:business venture owned by two or more individuals who are jointly and personally liable for the venture’s liabilities
Joint Liability:legal action treats all partners equally as a group
5
![Page 6: Leach & Melicher - Ch 03 Organizing and Financing a New Venture - Ef](https://reader036.vdocument.in/reader036/viewer/2022062305/5695cfd31a28ab9b028fb766/html5/thumbnails/6.jpg)
Partnerships (continued)
Joint and Several Liability:allows subsets of partners to be the object of legal action related to the partnership
Limited Partnership:limits limited partner liabilities in a partnership to the amount of their equity capital contribution to the partnership
6
![Page 7: Leach & Melicher - Ch 03 Organizing and Financing a New Venture - Ef](https://reader036.vdocument.in/reader036/viewer/2022062305/5695cfd31a28ab9b028fb766/html5/thumbnails/7.jpg)
Corporations
Corporation:a legal entity that separates personal assets of the owners (shareholders) from the assets of the business
Limited Liability:creditors can seize the corporation’s assets but have no recourse against the shareholders’ personal assets
Corporate Charter:legal document that establishes the corporation
S Corporation:provides limited liability for shareholders; plus, corporate income is taxed like personal income to the shareholders
7
![Page 8: Leach & Melicher - Ch 03 Organizing and Financing a New Venture - Ef](https://reader036.vdocument.in/reader036/viewer/2022062305/5695cfd31a28ab9b028fb766/html5/thumbnails/8.jpg)
Limited Liability Companies (LLCs)
Limited Liability Company (LLC):a business organization owned by “members” (shareholders) with limited liability
Major Incentive for Organizing as an LLC earnings can be taxed at the personal income tax
rates of the members
8
![Page 9: Leach & Melicher - Ch 03 Organizing and Financing a New Venture - Ef](https://reader036.vdocument.in/reader036/viewer/2022062305/5695cfd31a28ab9b028fb766/html5/thumbnails/9.jpg)
Bases for Comparing Various Business Organizational Forms
Number of Owners and Ease of Startup
Investor Liability Equity Capital Sources Firm Life and Liquidity of
Ownership Taxation
9
![Page 10: Leach & Melicher - Ch 03 Organizing and Financing a New Venture - Ef](https://reader036.vdocument.in/reader036/viewer/2022062305/5695cfd31a28ab9b028fb766/html5/thumbnails/10.jpg)
Number of Owners & Ease of Startup
Proprietorshipone; low time and legal costs
Partnership (general)two or more; moderate time and legal costs
Limited Partnershipone or more general and one or more limited partners; moderate time and legal costs
10
![Page 11: Leach & Melicher - Ch 03 Organizing and Financing a New Venture - Ef](https://reader036.vdocument.in/reader036/viewer/2022062305/5695cfd31a28ab9b028fb766/html5/thumbnails/11.jpg)
Number of Owners & Ease of Startup (continued)
Corporation (C)one or more, with no limit; high time and legal costs
S (Subchapter S) Corporationless than 100 owners (since 2005); high time and
legal costs Limited Liability Company (LLC)
one or more, with no limit; high time and legal costs
11
![Page 12: Leach & Melicher - Ch 03 Organizing and Financing a New Venture - Ef](https://reader036.vdocument.in/reader036/viewer/2022062305/5695cfd31a28ab9b028fb766/html5/thumbnails/12.jpg)
Investor Liability
Proprietorshipunlimited
Partnership (general)unlimited (joint and several liability)
Limited Partnershiplimited partners’ liability limited to their investments
12
![Page 13: Leach & Melicher - Ch 03 Organizing and Financing a New Venture - Ef](https://reader036.vdocument.in/reader036/viewer/2022062305/5695cfd31a28ab9b028fb766/html5/thumbnails/13.jpg)
Investor Liability (continued)
Corporation (C)limited to shareholders’ investments
S (Subchapter S) Corporationlimited to shareholders’ investments
Limited Liability Company (LLC)limited to owners’ investments
13
![Page 14: Leach & Melicher - Ch 03 Organizing and Financing a New Venture - Ef](https://reader036.vdocument.in/reader036/viewer/2022062305/5695cfd31a28ab9b028fb766/html5/thumbnails/14.jpg)
Equity Capital Sources
Proprietorshipowner
Partnership (general)partners, families, and friends
Limited Partnershipgeneral and limited partners
14
![Page 15: Leach & Melicher - Ch 03 Organizing and Financing a New Venture - Ef](https://reader036.vdocument.in/reader036/viewer/2022062305/5695cfd31a28ab9b028fb766/html5/thumbnails/15.jpg)
Equity Capital Sources (continued)
Corporation (C)venture investors and common shareholders
S (Subchapter S) Corporationventure investors and Subchapter S investors
Limited Liability Company (LLC)venture investors and equity offerings to owners
15
![Page 16: Leach & Melicher - Ch 03 Organizing and Financing a New Venture - Ef](https://reader036.vdocument.in/reader036/viewer/2022062305/5695cfd31a28ab9b028fb766/html5/thumbnails/16.jpg)
Firm Life & Liquidity of Ownership
Proprietorshiplife determined by owner; often difficult to transfer ownership
Partnership (general) life determined by partners; often difficult to transfer ownership
Limited Partnershiplife determined by general partner; often difficult to transfer ownership
16
![Page 17: Leach & Melicher - Ch 03 Organizing and Financing a New Venture - Ef](https://reader036.vdocument.in/reader036/viewer/2022062305/5695cfd31a28ab9b028fb766/html5/thumbnails/17.jpg)
Firm Life & Liquidity of Ownership (continued)
Corporation (C) unlimited life; usually easy to transfer ownership
S (Subchapter S) Corporationunlimited life; often difficult to transfer ownership
Limited Liability Company (LLC)life set by owners; often difficult to transfer ownership
17
![Page 18: Leach & Melicher - Ch 03 Organizing and Financing a New Venture - Ef](https://reader036.vdocument.in/reader036/viewer/2022062305/5695cfd31a28ab9b028fb766/html5/thumbnails/18.jpg)
Taxation
Proprietorshippersonal tax rate
Partnership (general)personal tax rates
Limited Partnershippersonal tax rates
18
![Page 19: Leach & Melicher - Ch 03 Organizing and Financing a New Venture - Ef](https://reader036.vdocument.in/reader036/viewer/2022062305/5695cfd31a28ab9b028fb766/html5/thumbnails/19.jpg)
Taxation (continued)
Corporation (C)corporate taxation; dividends subject to personal tax rates
S (Subchapter S) Corporationincome flows to shareholders; taxed at personal tax rates
Limited Liability Company (LLC)income flows to owners; taxed at personal tax rates
19
![Page 20: Leach & Melicher - Ch 03 Organizing and Financing a New Venture - Ef](https://reader036.vdocument.in/reader036/viewer/2022062305/5695cfd31a28ab9b028fb766/html5/thumbnails/20.jpg)
What is Intellectual Property? Intellectual Property:
a venture’s intangible assets and human capital, including inventions that can be protected from being freely used or copied by others
20
![Page 21: Leach & Melicher - Ch 03 Organizing and Financing a New Venture - Ef](https://reader036.vdocument.in/reader036/viewer/2022062305/5695cfd31a28ab9b028fb766/html5/thumbnails/21.jpg)
Protecting Valuable Intangible Assets
There are Four Forms of Protection: Patents Trade Secrets Trademarks Copyrights
21
![Page 22: Leach & Melicher - Ch 03 Organizing and Financing a New Venture - Ef](https://reader036.vdocument.in/reader036/viewer/2022062305/5695cfd31a28ab9b028fb766/html5/thumbnails/22.jpg)
Intellectual Property Protection Methods: Basic Definitions
Patents:intellectual property rights granted for inventions that are useful, novel, and non-obvious
Trade Secrets:intellectual property rights in the form of inventions and information, not generally known to others, that convey economic advantages to the holders
22
![Page 23: Leach & Melicher - Ch 03 Organizing and Financing a New Venture - Ef](https://reader036.vdocument.in/reader036/viewer/2022062305/5695cfd31a28ab9b028fb766/html5/thumbnails/23.jpg)
Intellectual Property Protection Methods: Basic Definitions (cont’d)
Trademarks:intellectual property rights that allow firms to differentiate their products & services through the use of unique marks
Copyrights:intellectual property rights to writings in printed and electronically stored forms
23
![Page 24: Leach & Melicher - Ch 03 Organizing and Financing a New Venture - Ef](https://reader036.vdocument.in/reader036/viewer/2022062305/5695cfd31a28ab9b028fb766/html5/thumbnails/24.jpg)
Patent Basics
Intellectual property rights granted for inventions that are “useful,” “novel,” and “non-obvious.”
Patents are granted by the U.S. Patent and Trademark Office
Patent law is very complex (you most likely need to hire a patent applications specialist lawyer)
24
![Page 25: Leach & Melicher - Ch 03 Organizing and Financing a New Venture - Ef](https://reader036.vdocument.in/reader036/viewer/2022062305/5695cfd31a28ab9b028fb766/html5/thumbnails/25.jpg)
Four Kinds of Patents:1. Utility Patents:
cover mechanical or general inventions, chemical inventions, and electrical inventions
2. Design Patents:cover the “appearance” of items (e.g., sports uniforms, electronic products, and autos)
3. Plant Patents:protect discoveries of asexual reproduction methods of new plant varieties
4. Business Method Patents:protect specific ways of doing business and the underlying computer codes and technology
25
![Page 26: Leach & Melicher - Ch 03 Organizing and Financing a New Venture - Ef](https://reader036.vdocument.in/reader036/viewer/2022062305/5695cfd31a28ab9b028fb766/html5/thumbnails/26.jpg)
Utility Patents: Basic Information
A new idea by itself cannot be patented
The idea must be part of an invention that has a “physical form” such as a product
The physical form also can exist as a sequence of steps contained in a process or the delivery of a service
26
![Page 27: Leach & Melicher - Ch 03 Organizing and Financing a New Venture - Ef](https://reader036.vdocument.in/reader036/viewer/2022062305/5695cfd31a28ab9b028fb766/html5/thumbnails/27.jpg)
Utility Patents: Application Process
Develop or conceive an invention Prepare (you, or a registered patent
attorney on your behalf) a patent application
File the application in U.S. Patent and Trademark Office
If successful, the utility patent life will be 20 years (prior to mid-1995 the life was 17 years)
27
![Page 28: Leach & Melicher - Ch 03 Organizing and Financing a New Venture - Ef](https://reader036.vdocument.in/reader036/viewer/2022062305/5695cfd31a28ab9b028fb766/html5/thumbnails/28.jpg)
Utility Patents: Provisional Patent Application
Beginning in mid-1995, inventors were permitted to file a provisional application
Filing dates can be established more quickly & at lower costs, and small entities are charged lower filing fees
Allows the inventor to use the term “patent pending” on the invention
However, patent rights and protection occur only when a patent is issued
28
![Page 29: Leach & Melicher - Ch 03 Organizing and Financing a New Venture - Ef](https://reader036.vdocument.in/reader036/viewer/2022062305/5695cfd31a28ab9b028fb766/html5/thumbnails/29.jpg)
Provisional Patent Application Requirements & Conditions
An invention title, the inventor’s name, residence, and address for correspondence
Clearly written description and “drawings”
A person skilled in the art of the invention’s area should be able to use or practice the invention
Has a life of 12 months and will be abandoned unless a regular patent application is filed
29
![Page 30: Leach & Melicher - Ch 03 Organizing and Financing a New Venture - Ef](https://reader036.vdocument.in/reader036/viewer/2022062305/5695cfd31a28ab9b028fb766/html5/thumbnails/30.jpg)
Regular Patent Application Requirements
A detailed written description of the invention and detailed drawings of how the invention works
One or more claims justifying why the invention should be patented
Inventor must indicate the “best use” or method of practicing or carrying out the invention
30
![Page 31: Leach & Melicher - Ch 03 Organizing and Financing a New Venture - Ef](https://reader036.vdocument.in/reader036/viewer/2022062305/5695cfd31a28ab9b028fb766/html5/thumbnails/31.jpg)
Why Might Your Patent Application be Rejected?
For a patent application to be accepted, the invention must be:
Usefulthe invention cannot just “do nothing”
Novelthe invention was not previously produced, described in a publication, or patented
Non-Obviousinvention should be “non-obvious” to a person with ordinary skills in the art of the invention’s area or subject
31
![Page 32: Leach & Melicher - Ch 03 Organizing and Financing a New Venture - Ef](https://reader036.vdocument.in/reader036/viewer/2022062305/5695cfd31a28ab9b028fb766/html5/thumbnails/32.jpg)
Why Might Your Patent Application be Rejected (cont’d)?
Timing of filing the application must be filed within one year of first introduction
to the public in the future, it may be necessary to file prior to
any public disclosure or use
32
![Page 33: Leach & Melicher - Ch 03 Organizing and Financing a New Venture - Ef](https://reader036.vdocument.in/reader036/viewer/2022062305/5695cfd31a28ab9b028fb766/html5/thumbnails/33.jpg)
What Does Having a Patent do for the Inventor?
The government does not enforce your rights
The burden of enforcing the patent lies with the inventor and enforcement can be costly
Records indicate that over one-half of patent infringement suits taken to court are not upheld on behalf of the inventor
33
![Page 34: Leach & Melicher - Ch 03 Organizing and Financing a New Venture - Ef](https://reader036.vdocument.in/reader036/viewer/2022062305/5695cfd31a28ab9b028fb766/html5/thumbnails/34.jpg)
Trade Secrets Trade secrets:
intellectual property rights in the form of inventions & information (e.g., formulas, processes, customer lists, etc.)
Trade secrets are not generally known to others & convey economic advantages to the holders
34
![Page 35: Leach & Melicher - Ch 03 Organizing and Financing a New Venture - Ef](https://reader036.vdocument.in/reader036/viewer/2022062305/5695cfd31a28ab9b028fb766/html5/thumbnails/35.jpg)
Trade Secrets (continued) Why Consider Protection as a
Trade Secret instead of as a Patent? trade secret law can sometimes protect inventions
that did not qualify for patents some inventors want to avoid the detailed
disclosure required by the U.S. Patent and Trademark Office
there are no time restrictions on trade secrets (in contrast to patents)
35
![Page 36: Leach & Melicher - Ch 03 Organizing and Financing a New Venture - Ef](https://reader036.vdocument.in/reader036/viewer/2022062305/5695cfd31a28ab9b028fb766/html5/thumbnails/36.jpg)
Trade Secrets (continued) What are Drawbacks of Seeking
Protection under Trade Secrets Law? there is no formal procedure for obtaining
protection as a trade secret protection is established by the secret’s
characteristics and efforts to protect it holders do not have exclusive “rights” to what
comprises the secret (someone could independently replicate the secret)
36
![Page 37: Leach & Melicher - Ch 03 Organizing and Financing a New Venture - Ef](https://reader036.vdocument.in/reader036/viewer/2022062305/5695cfd31a28ab9b028fb766/html5/thumbnails/37.jpg)
Trademarks
What are Trademarks?Intellectual property rights that allow firms or others to differentiate their products and services through the use of unique “marks”
Marks allow consumers to easily identify the source and quality of products/services
37
![Page 38: Leach & Melicher - Ch 03 Organizing and Financing a New Venture - Ef](https://reader036.vdocument.in/reader036/viewer/2022062305/5695cfd31a28ab9b028fb766/html5/thumbnails/38.jpg)
Trademarks (continued) Most trademarks take the form of names,
words, or graphic designs Trademarks also can be on the shape of
packages, colors, odors, and sounds Trademarks are the most valuable form
of intellectual property for many firms A trademark should be suggestive of (but
not describe) a product or product line
38
![Page 39: Leach & Melicher - Ch 03 Organizing and Financing a New Venture - Ef](https://reader036.vdocument.in/reader036/viewer/2022062305/5695cfd31a28ab9b028fb766/html5/thumbnails/39.jpg)
Trademarks (continued) How do You Obtain or Disclose a
Trademark (or ™)? no formal government procedure exists for
establishing a trademark ownership is established by being first to use the
mark on products a trademark can be lost if the mark becomes a
generic term or label (e.g., “aspirin” or “cellophane”)
39
![Page 40: Leach & Melicher - Ch 03 Organizing and Financing a New Venture - Ef](https://reader036.vdocument.in/reader036/viewer/2022062305/5695cfd31a28ab9b028fb766/html5/thumbnails/40.jpg)
Trademarks (continued) How do You Register a Trademark?
a trademark can be registered in individual states or with the U.S. Patent and Trademark Office
a federal registration should be used if a product is sold in more than one state
products with federally registered trademarks show the trademark accompanied by ®
40
![Page 41: Leach & Melicher - Ch 03 Organizing and Financing a New Venture - Ef](https://reader036.vdocument.in/reader036/viewer/2022062305/5695cfd31a28ab9b028fb766/html5/thumbnails/41.jpg)
Copyrights
Intellectual property rights to “writings” in written and electronically-stored forms
Protects the “form of expression of an idea” and not just words themselves
Traditional way to establish a copyright is to “publish” your book or other work accompanied by a copyright notice using the word “Copyright” or the symbol ©
41
![Page 42: Leach & Melicher - Ch 03 Organizing and Financing a New Venture - Ef](https://reader036.vdocument.in/reader036/viewer/2022062305/5695cfd31a28ab9b028fb766/html5/thumbnails/42.jpg)
Other Methods for Protecting Intellectual Property Rights
Confidential Disclosure Agreements:documents used to protect an idea or other forms of intellectual property when disclosure must be made to another individual or organization
Employment Contracts:agreements between an employer and employee whereby the employer employs the employee in exchange for the employee agreeing to keep confidential information secret and to assign ideas and inventions to the employer
42
![Page 43: Leach & Melicher - Ch 03 Organizing and Financing a New Venture - Ef](https://reader036.vdocument.in/reader036/viewer/2022062305/5695cfd31a28ab9b028fb766/html5/thumbnails/43.jpg)
Seed & Startup Financing Financial Bootstrapping
minimizing need for financial capital and finding unique ways of financing a new venture
Business Angelswealthy individuals who invest money in fledgling ventures in exchange for the excitement of launching a business and a share in any financial rewards
43