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Funding for Philanthropic Efforts Requires More Effort Than Normal

by Guest Author on September 26, 2011

One sad fact in our capitalistic world is that funding for many worthwhile efforts is often difficult to obtain if there is not a direct profit opportunity to be had.  Non-profit’s and local community leaders need special assistance, especially in developing countries, to gain access to appropriate resources of capital devoted to their respective purposes.

Attempting to improve the health, education, and welfare of the impoverished by starting a business designed to support the local need is admirable, but your typical banker is not the one to be approached for a business loan. Most people that follow this route are too often met with the reality of bank lending practices.  Loans cannot be made without collateral, and the security of this collateral must meet high standards set by each individual bank.  If the project fails, the bank wants something to salvage to recover its money.  It also will not lend unless there are “visible” flows of cash to pay back the loan over the loan’s term

If banks will only make a business loan under these conditions, how is a local effort to get funded in the first place?  Most often, if the initiative is not driven by an organization that already has funding, then the effort will require more effort than with a normal startup venture.  There are philanthropic institutions, both charitable and faith based, which are devoted to this purpose.  The difficulty involves approaching the right organization and applying for a grant in the appropriate manner, not an easy task when language and cultural barriers stand in the way.

Local development agencies should be approached first since their reason for being is to assist with projects of a non-profit nature for the good of the regional community.  These groups should also have information and contacts at larger organizations that may not be in the local area.  There are an enormous number of philanthropic groups around the globe that network through many smaller organizations.  If you do not meet success at the first one contacted, they may connect you with a group that will be eager to help.  Here are a few examples of these larger groups:

  • The Africa Grantmakers’ Affinity Group (AGAG) is a membership organization of foundations that either fund or are interested in funding in Africa.  AGAG has its roots in the South Africa.  These influential managers are instrumental in sharing and learning the most effective ways to support development efforts in Africa.
  • The African Women’s Development Fund (AWDF) is a fund-raising and grant-making initiative, which aims to support the work of the African Women’s movement.  AWDF, the first Africa-wide fund-raising and grant-making fund, was established in June 2000.
  • The U.S. Agency for International Development (USAID) promotes peace and stability by fostering economic growth, protecting human health, providing emergency humanitarian assistance, and enhancing democracy in developing countries.  USAID has working relationships, through contracts and grant agreements, with more than 3,500 companies and over 300 U.S.-based private voluntary organizations.


Tom Cleveland is a writer for SmallBusinessLoansDirect.com.  He has over 30 years of experience in executive management, corporate governance and business development.  Tom served as CFO for various Visa International entities from 1980 until his retirement in 1999 and was instrumental in expanding the global reach of the Visa system.  Tom’s writing on business issues has appeared in the NY Daily News and BusinessInsider among others.

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Women Business Owners – This Is Your Moment

by Chelle Parmele on September 9, 2011

Yesterday I was sent a link to a study on women owned businesses. While some of the data is a few years out of date, I was caught by this particular piece of information:

In 2004, Women owned 10.6 million businesses in the United States. They employed 19.1 million workers–that’s one in every seven employees and their businesses accounted for $2.5 trillion in sales.

It was shortly after reading that I received information from a friend of Bplans.com – Natalie MacNeil of She Takes on the World. She and Natalie Sisson of The Suitcase Entrepreneur have created an online business system called WE Mastermind.

“It all comes down to persistence, determination, the right tools, the right knowledge, the right systems and one heck of a power team pulling you towards your well deserved success.

That’s what WE Mastermind is all about.”

In a nutshell – WE Mastermind is a 6-month program designed to not only get your online business up and running, but profitable. “Natalie Squared” have a mission to ensure you find your sweet spot, then package it into a product or service that allows you to create a profitable online business.

Check out the WE Mastermind website for all the information on the course as well as the resources and tools you get in the package. (Full disclosure:  Palo Alto Software’s Start, Run and Grow Your Business software is part of the list of value added resources you get from purchasing the course)

Learn more about WE Mastermind.  Early bird pricing ends THIS SUNDAY (September 10th) so take advantage of this offer now!

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Need Funds: What About Family and Friends?

by Susan Solovic on August 2, 2011

Various Federal Reserve Notes, c.1995. Only th...

Image via Wikipedia

“I’ve got a great idea for a business, but I don’t have any money to get it started! Where can I get money from the government or find investors to help me start my business?”

If I had a dime for every time I’ve been asked this question, I’d be wealthy enough to establish my own small-business loan company. Almost every person with a start-up business wishes he or she had money—or more money to grow an established business. In fact, many people use their lack of funds as an excuse for not starting or expanding their businesses. Here’s what I tell them: You must not really want to make it happen! Successful entrepreneurs realize there are many ways to bootstrap yourself to success.

One of the most popular ways to find the business funding you need is to ask your family and friends. However, mixing money and relationships can be a recipe for disaster, but it doesn’t have to be that way. The Limited, one of my favorite trendy clothing stores, was started in 1963 by Leslie Wexner, who borrowed $5,000 from his aunt to open a small women’s retail shop called Leslie’s Limited. The Limited now operates in thousands of cities across the United States and boasts revenues in the billions. So there are a number of success stories that involve family/friend financing. However, there are many sad tales as well.

Most of the relationship problems occur because the transactions were handled poorly. Therefore, to avoid a relationship disaster, before seeking funds from family and friends, you have to do the proper preparation—it is vital. You need to approach a family/friend loan as professionally as you would any other source of funding. You need to be prepared with your business plan and a professional presentation. Demonstrate to your potential investors that you have a well-thought-out plan with defensible strategies and projections.

Even before you begin dialing for dollars, make a list of potential investors—people you know, including family, friends, and business associates. At this stage, you don’t worry about whether you think they’ll be interested, you just make the list.

Once you have your list, you can narrow it down. Here are some things to consider:

• Affluence. Can this person afford to lose the money? Remember, there is a high degree of risk involved in investing in a small business, so consider the individual’s financial well-being.
• Business experience. The best investor is someone who understands the entrepreneurial process and can evaluate your business prospects. Often successful entrepreneurs are interested in learning about new ventures and helping new businesses succeed.
• Emotional baggage. Avoid asking someone with whom you have had conflict in the past. A precarious relationship could lead to problems in your business. Additionally, don’t ask someone who may have to deal with repercussions from others in the event he or she loans you money. For example, a spouse who might become angry about the investment could create serious problems, and you don’t need additional issues to deal with when you are trying to get your business off the ground.

Once you have narrowed your list down to the top potential investors, schedule meetings with them to discuss the opportunity. (Don’t ambush them at a cocktail party or family gathering and ask for the cash.) After you meet with them and review your plan, give them time to review the information and think it over. Never put pressure on anyone to make an immediate decision. Ask when would be a good time to follow up.

Be careful about getting your hopes up just because someone agrees to meet with you. People will often say no regardless of their feelings toward you. Don’t take it personally. There may be issues in their lives of which you aren’t aware, and those may make them uncomfortable loaning or investing at this time. Never get angry or make someone feel guilty, and don’t resort to emotional blackmail. Maintain your integrity. Things may change and you never know when you might need to approach someone again in the future.

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Acting With Incomplete Information in a Startup

by Joel Gascoigne on June 9, 2011

As a fledgling entrepreneur in the midst of a growing startup, I try to read quite a lot around the subject. I’ve been deeply involved in startup culture for around two years now and I often find myself reflecting on my learning and relating it back to articles I have previously read. Recently this happened again for me in the topic of making decisions based on incomplete information.

Incomplete information

I first came across the phrase “acting with incomplete information” in a blog post Mark Suster wrote over a year ago titled “What makes an Entrepreneur? Four Letters: JFDI”. In the article he writes about the importance of moving forward when you don’t have complete information:

Entrepreneurs make fast decisions and move forward knowing that at best 70% of their decisions are going to be right. They move the ball forward every day. They are quick to spot their mistakes and correct.

I’ve only recently realised the true importance of this concept, and what it actually means in reality. It is one of those things which I’ve read and thought I understood, but I’ve realised how different it can be when you’re actually experiencing it.

What about the lean startup?

I’m scientifically minded, so when I first heard about the lean startup concepts pioneered by Eric Ries, I was completely hooked on the idea. The concepts are fantastic, and the way Eric Ries has distilled them is hugely beneficial for anyone trying to build a startup. I’ve used them myself to great effect. However, with descriptions of lean startup such as the one below, it can be easy to assume that you should make decisions only based on facts and never based on opinion or incomplete information.

Build a company-wide culture of decision-making based on real facts, not opinions.

What I have realised over time is that some of the aspects of the lean startup are more useful at certain times than others. For example, when you are just getting started and have only a trickle of traffic, you really can’t gain the volume of data you need for A/B testing. In the early days, talking to customers and gaining validated learning is one of the most useful things to do, but even if you gain a huge amount of feedback you cannot be 100% sure of anything. In the end, you have to take the leap.

Mark Suster is right: almost all of the time you have to make decisions without knowing what the outcome will be. I’ve mentioned that my mind is wired to think about things in logical ways, so “acting without complete information” is one of the things about doing a startup which I have struggled with the most.

Stop fearing acting without complete information

Over time, I have realised there are some ideas which really help me to be better at acting without complete information. Here are a few of the things which have worked well for me:

Create a fear of not shipping

When you think too much about the fact that you have to take the leap and act without complete information, you can start to fear what the consequences might be when you ship. There are all sorts of things that could go wrong, after all. I the past I have really feared shipping, but gradually over time I have started to question what the worst thing to happen could be, and I’ve actually developed a fear of not shipping.

Realise that everyone has to act without complete information

One useful thing to do is remind yourself that whilst history has some rhythms, it never repeats itself. Even the most experienced entrepreneurs have to assess things with a fresh mind when they embark on a new venture. It could even be argued that having less experience is sometimes a good thing. Whatever your experience is, remember that everything you do is new to a certain extent, and your situation is different to any other situation that has ever occurred.

Remember that failure is the best way to learn

In some cultures failure is more accepted than others. I live in the UK, and especially in business it is often seen that if you fail once you should just give up. I have realised over time that failure is not really a binary thing, so it is never as bad as you might think. I have also realised that “failure” or “something not working out as imagined” is one of the best ways to learn something.

“Success is going from failure to failure without losing your enthusiasm.” – Abraham Lincoln

Are you acting without complete information? Do you think you need to do it more? I’d love to hear about your thoughts and experiences.

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How Do I Find a Business Plan Writer?

by Tim Berry on March 18, 2011

I’ve been working with the team at Palo Alto Software on a series of videos to help you with business planning. This video is about hiring a business plan writer (or not) to help with business planning.

What do you think about my advice on hiring a consultant to help with business planning. By the way, would you like more business tip videos like this?

Video Transcription

So how can I help you find that business plan writer to write your business plan? I can’t.

I’m going to be honest. The most you want is a coach who’s been through it, who knows how to help you and maybe you want somebody to become part of the team whose done the process of raising money if that’s what you’re after. Experience helps. Knowledge helps, but the plan that somebody does for you rarely works.

Your plan will change. Frequently. You have to own it. You have to know what’s in it. You have to be able to get there, communicate it, and yes, plans are never accurate for the future. They help you change things but if you don’t manage it yourself, you’re not going to be able to manage the changing and it won’t help you steer your business, so yes, I’m biased in this. I happen to believe in Business Plan Pro which I wrote, its conceptual author, there’s a whole team of programmers now but yes, I believe in Business Plan Pro. It helps to do the mechanics, it helps to do the financials, it gives you the certainty that… well that the math and the finance will be right if your assumptions are right, and it helps you focus on managing the business by a good planning process rather than just getting some document that somehow it’s going to be done.

If your company stays alive, your business plan will never be done. It will help you manage that company and know that company but it will be a process that you use to steer the company towards the future that you want. Want to know why you want to do it? To control your destiny. That’s why you do it.

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Just Getting Going, Building, or Planning to Fly?

by Tim Berry on January 13, 2011

Talking about starting a business? Before you start the talking, identify yourself and your business on this scale. It makes a huge difference. Try to choose one of three possible choices, the one that most applies to you and your business.

  1. Just get going: you don’t need anybody’s approval except possibly your first customer or client. You’re a consultant, artist, artesan, professional service, or something else that doesn’t require building a product, or packaging, or design. Nobody has to approve your plan except you. You have what you need to get going, or the money you need to acquire what you need to get going.
  2. Building something: You’re looking to start a business that requires more start-up money than you have, maybe more knowledge than you have. This is like a restaurant, an auto body shop, a retail store, a serious website, anything that requires building serious products, or packaging, or significant market launch. For the restaurant, as an example, by the time you buy the expresso machine, the chairs and tables and stoves and ovens, hire the people, develop the identity, prepare the location, you’ve spent serious money. You need investors, or partners, or (gulp) a lot of debt.
  3. Planning to fly: You have worked with a successful startup or two or three behind you, you’ve got a team ready, and you have an idea that seems to offer very high growth of sales (or maybe web traffic instead of sales, if you’re in that world) and reasonable prospects of defensibility.

All three of these are startups, but they have very different needs and wants and prospects. One of the things I want to do with this new blog is distinguish between these different kinds of startups. Much of the writing and thinking about startups applies to some but not all startups. Here are some examples:

  1. What do you need to start a business? I’m a business planner, I have been for years, so you think I’m going to start talking about the business plan.*  However, while I do think everybody benefits from planning, if you’re in that first group — the get going group — when what you really need, can’t start without, is at least one customer. I supported my family with planning and research consulting for more than a decade before Palo Alto Software took off, and that business started with a customer (Apple Computer) before there was a plan.*  If you’re in the second group, the builder group, then yes, you need to develop a business plan. You can’t get customers until you have a location rented and fixed up, you have assets in place, you’ve launched the marketing, etc. You don’t have the resources on your own, so you’ve got to involve others, and that takes a lot of explaining, and making commitments, and, frankly, it’s just dumb to try to go that way without having a prepared plan.

    *  If you’re in the third group, intending to fly, some of the more fashionable high-tech and highly-visible ventures of recent years were able to land at least verbal agreement on venture financing without actually completing a full traditional business plan document. They used pitch presentations and personal track records and personal commitments. Those, however, are the exceptions; most of the high flyers need a plan whether their investors read it in detail or not, because they can’t build a pitch without a plan and they can’t manage without a plan. Of course some of them avoid the plan because they confuse it with a brick wall, but that’s a different post.

  2. The legal steps change. The “just get going” crowd doesn’t really need to sweat the difference between corporations and partnerships and LLCs and ficticious business names. I ran my consulting business for years using my real name and my social security number. I didn’t worry about corporate umbrellas or the extra expense of legal formation because — who was I kidding? — it was just me and my client. I was a lot more worried about how long they took to pay invoices than about them suing me. Those of you in the “planning to fly” group, in contrast, are going to have legal work coming out of your ears, lots of jockeying for position between your lawyers and their lawyers, with their lawyers having the final say because they’re writing the checks. You builders will need good attorneys to set you up right, with the details depending on what you’re doing, resource levels, which state, and other factors.

So those are just a couple of examples, but I assume you get my point. In this blog, talking about startups, let’s establish a better mode for talking about apples as apples and oranges as oranges; or something like that.

Tim Berry is the president of Palo Alto Software Inc., based in Palo Alto, Calif,  which produces the industry’s leading business planning software, Business Plan Pro, as well as other popular planning applications for businesses. He is also the author of The Plan-As-You-Go Business Plan, published by Entrepreneur Press.

This article first appeared on UpandRunning.Entrepreneur.com on August 23rd, 2007. ©Entrepreneur Media, Inc.  All rights reserved

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Time for a Plan B

by Alan Gleeson on January 7, 2011

One of the main challenges entrepreneurs face is gaining market acceptance or traction i.e. custom in sufficient volumes to transition to profitability. If they are not getting traction after one month of operations, entrepreneurs need to quickly assess what they need to do to fix matters. Increasingly this means they need to be extremely flexible with their business models, something that is a lot easier to achieve in less capital intensive start-up’s such as Internet based ones.

This flexibility is something that does not always sit easily with their early stage investors (investors tend to want some degree of certainty with regard to the type of business they were investing in). In the past protection was provided by documents such as the business plan, and the Memorandum of Association which set out the line of activities a company could undertake.

However such inflexibility is no longer wise, a point author Steve Blank argues in his post ‘But what does a Business Model have to do with my startup’ . In this article he states that the primary role of an entrepreneur is to iterate and test assumptions and hypotheses they have made with regard to customer behaviour and demand until they find a commercially viable business model.

‘Your startup is essentially an organization built to search for a repeatable and scalable business model’

In other words he is saying that entrepreneurs operate in such an uncertain environment that flexibility has to lie at the heart of everything they do and they are essentially functioning as a market researcher.

In many respects this shift in perspective is most appropriate to Internet startups where entrepreneurs can develop a website at low cost, offer a range of services and focus their efforts on the one that gains most traction. Hence a key skill is to know how to ‘pivot’ to an alternative product a concept author Eric Ries first described;

“I want to introduce the concept of ‘the pivot’, the idea that successful startups change directions but stay grounded in what they’ve learned. They keep one foot in the past and place one foot in a new possible future. Over time, this pivoting may lead them far afield from their original vision, but if you look carefully, you’ll be able to detect common threads that link each iteration.”

Ries is a key proponent of something called the Lean Startup movement, which argues that startups need to develop products and markets by focusing on testing, agile development, constant iteration in response to customer feedback and the need to have a very strong customer focus.

While Ries and Blank talks about the need for entrepreneurs ‘to pivot’ , authors of the book Getting to Plan B, John Mullins and Randy Komisar  argue a similar point advising entrepreneurs to recognise the importance of having a ‘Plan B’.  They argue that many start-ups build business plans on flawed assumptions and fail as a result. They prescribe a systematic process which bears many similarities to the methodology prescribed by Blank, where the entrepreneur is encouraged to iterate, replicate innovation seen elsewhere, and to ensure that they are learning from their experiences.

Paypal is a great example of one such company that went through numerous iterations before settling on an email payment system. As founder Reid Hoffman described recently;
‘Over the years PayPal has made multiple significant pivots. The company started as a mobile encryption platform. Then it was a mobile payments company. Next PayPal was a combination mobile and Web site payments company. Finally PayPal became an email payments company. Each pivot over the life of the company was the result of rethinking the business but maintaining the vision. The focus was always to become a payments operating system; but the nature of the operating system changed multiple times.’

The implications for both entrepreneurs are investors are pretty straight forward.  Early stage investors need to encourage entrepreneurs to focus less on the product side and more on the customer side. Entrepreneurs must not blindly adhere to a business plan, but rather use business planning in the form of milestones, targets and goals to ensure that they can spot when something is not working and pivot accordingly.
Alan Gleeson is the General Manager of Palo Alto Software, Ltd, creators of Business Plan Pro®. He holds an MBA from Oxford University and an MSc from University College, Cork, Ireland. For further information on writing a business plan, visit www.paloalto.co.uk

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Making Facebook THE Social Network

by sara on October 5, 2010

This is our third post on startup lessons from David Fincher’s new film about the founding of Facebook, The Social Network. We’ve already seen that business ideas aren’t protected, and that startups, especially, need to be clear on partnership agreements, and whether partners are actually a good idea. Today, the important lesson is about actually shipping, getting to market, and seizing opportunities.

Doing, marketing, selling is what makes a successful business
While the Winklevoss twins and Divya Narendr focused on the idea of the business, Mark Zuckerberg actually coded and launched a product. When his friend and partner Eduardo Saverin dragged his feet on investment and expansion decisions, Zuckerberg cut him loose to move faster.

The success of Facebook wasn’t about the idea. Business ideas aren’t actually worth very much. “If you have a good idea, a thousand other people have the same idea. You’re in a race to take that idea and make it happen, make it real. You build the business, you don’t just have the idea.”

As one commenter wrote about the case back in 2007, “I have taken a look at ConnectU and their script…anybody could write such a script..what makes Facebook facebook, is not because of any code or script…it’s Faceboook’s strategy and [how they] positioned themselves.”

Zuckerberg himself credits Facebook’s success to three things:

* Boldness
* Speed
* Focus

Zuckerberg used his technical savvy to take an event that was already happening offline – college students socializing – and move it online. Boldness and speed were apparent even in the one-day success of an earlier experimental site, Facemash, which he created in a weekend while at Harvard. According to the Harvard Crimson, Zuckerberg intended to share the site only with a few friends, but it quickly spread across campus to get 22,000 votes. No doubt that early feedback (and the fact that more than half of all Harvard undergrads joined Facebook in its first month) helped encourage him to moved quickly to expand beyond his initial market (Harvard) into other colleges, and then to non-college students.

Of course, as reviewer Richard Corliss says, “Zuckerberg would make billions selling friends — and if need be, the film reckons, selling them out.”

Making it, getting it launched and to market, is especially true for startups now, in a down economy, as venture capitalist Guy Kawasaki explains.

“In today’s economy and tight credit markets, there is a much greater emphasis on getting to revenues fast and more emphasis on business models than before,” Kawasaki says. “You also meet companies that are further along. Whereas, a few years ago the accepted practice was you raised a bunch of money, then you went away for a year and built your software. You needed the money to hire people, buy tools and all that kind of stuff.”

Will you follow through, or foul up?

Sara Prentice Manela
Editor

P.S. Speaking of Facebook – Have you joined our fanpage?

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Partnerships, Sweat Equity, and The Social Network

by sara on October 4, 2010

This is our second post on startup lessons from the movie The Social Network, about the founding of Facebook. The movie did well over its opening weekend, reportedly bringing in $23 million, at the high end of studio estimates. But is it true to life?

Laura Sydell, a correspondent for NPR, saw the movie with half a dozen Silicon Valley entrepreneurs over the weekend. She reports their reactions:

“The movie captured the energy and intensity of an early stage startup,” says Ash Rust, an engineer at Klout, a company that ranks individual influence on Twitter. “People don’t sleep,” he says, “but when they do, they dream of a kingdom.” And the “kingdom” Rush and others dream about is “connecting the entire world” through their products.

“If I could create a revolution, I’m sure there would be casualties along the way,” says Jim Ying, general manager of Six Waves, a social gaming company that uses Facebook as its launch point.

Speaking of casualties, let’s look at our second lesson for anyone starting a new business.

Partnership agreements are really, really important

Aside from the vagueness surrounding their hiring of Zuckerberg, the Winklevoss brothers also apparently misunderstood the importance of getting all ownership and partnership agreements in writing. A subsequent arrangement they made with Wayne Chang, another student, to combine their ConnectU site with his i2hub filesharing program led to another lawsuit, and possibly one of the first official court complaints to include the transcript of an IM exchange as evidence of ownership shares.

But The Social Network is more concerned with another early partner, Eduardo Saverin. In 2004, Saverin was the CFO, and Zuckerberg’s roomate and good friend. He was also the main contributor to the book on which the film is based. A little revenge?

The facts: According to a June 28, 2006 article in The Rolling Stones, in 2004,

“He and Saverin each agreed to invest another $20,000 in the operation. While Zuckerberg was in California, Saverin stayed behind in New York. That decision would prove ill-advised… In July, Zuckerberg and Saverin had a mysterious falling out. Zuckerberg has filed a lawsuit, claiming Saverin jeopardized the company by freezing Facebook’s bank accounts. Saverin countersued, claiming that Zuckerberg never matched his $20,000 in seed money and, further, used that money for personal expenses. That summer, Zuckerberg transferred all intellectual-property rights and membership interests to a new version of the company in Delaware. The value of Saverin’s stock was unhinged from any further growth of Facebook, and Saverin was expunged as an employee.”

Zuckerberg explained his actions in an email to a friend by claiming that Saverin was jeopardizing the growth of the company: “Eduardo is refusing to co-operate at all…We basically now need to sign over our intellectual property to a new company and just take the lawsuit…I’m just going to cut him out and then settle with him. And he’ll get something I’m sure, but he deserves something…He has to sign stuff for investments and he’s lagging and I can’t take the lag.”

This sure makes for good movie drama, but a good partnership agreement could have prevented much in both lawsuits:

  • Valuing sweat equity vs. money: Any time you have people contributing unlike assets or expertise to a business, you have to agree in writing beforehand on the value of those contributions. In the Winklevoss/Chang case, Wang brought sweat equity, as well as the specific assets of i2hub. In his mind, that was worth at least as much as the $7,500 the Winklevosses later kicked in to keep the joint venture going, but they disagreed. In the Zuckerberg/Saverin case, there’s an argument ostensibly about an agreement for seed funding vs. the work that Zuckerberg put in to developing the site. Tim Berry offers lots of tips for dealing with sweat equity.
  • A partnership is about decisions, as well as ownership: Many startup founders think that getting a partner is a great idea, because it will bring in more money. They forget that the partnership, unless specifically stated otherwise, also brings in another person for decision-making. If you anticipate the need to move fast on issues where you and a partner may not immediately agree, you need to spell out in your partnership agreement how decisions will be handled in that case. If you can’t figure out a way to solve that, maybe you should go it without a partner.

Saverin was eventually given credit (and shares) for his role in Facebook’s founding. Avoid this kind of media attention yourself by crafting a good solid partnership agreement.

Sara Prentice Manela
Editor

P.S. Speaking of Facebook – Have you joined our fanpage?

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Startup lessons from The Social Network movie

by sara on October 1, 2010

David Fincher’s new film, The Social Network, could be subtitled “The Unauthorized Biography of a Startup.” Based on the book ‘The Accidental Billionaires’ by Ben Mezrich, The Social Network tells the story of Facebook’s founding and rise to fame through the lens of the lawsuits that arose around it almost from the beginning.

While critics contend that the movie is as much fiction as truth, it’s based on an all-too-typical scenario: business founders get started without a clear understanding of the legal implications of partnerships, intellectual property, and non-compete agreements, and are then surprised when complications arise.

Whether or not you’ve seen The Social Network yet, we found some great lessons any startup should take away from the movie.

Business ideas aren’t protected
Central to the storyline of the film is a misunderstanding about what constitutes intellectual property.

The facts: In late 2003, Cameron and Tyler Winklevoss and Divya Narendr asked fellow Harvard student Mark Zuckerberg, already known as a genius programmer, to write some code for a social networking site for students. Their oral agreement with Zuckerberg later created disputes as to whether they hired him, contracted with him for a portion of the profits, or what, but Zuckerberg admits to doing about 6 hours of work for them on the project, and claims he never committed to completing the project, but just that he was “helping out” some fellow students. At some point, he stopped answering their emails and in February 2004 launched his own social networking site, “Thefacebook.”

The basis of the resulting lawsuit was that Zuckerberg had “stolen their idea” and used it for his own profit.

But, as our own Tim Berry points out, “Business ideas aren’t protected. In 30 years of business and consulting, I’ve never heard of any laws to protect business ideas. Laws protect inventions with patents, creative works with copyright, and trade names with trademarks.”

If they had alleged instead that he had stolen their original code, that would be protected by copyright, so long as:

  • they, and not Zuckerberg, had actually created the code, or
  • they had an enforceable contract with Zuckerberg as an employee or contractor that gave them rights to anything he created while in their employ.

Alternatively, if they had made Zuckerberg sign a non-compete agreement before beginning work, in which he agreed not to create his own social networking site, or not to do related work for a certain period of time, they would have had a legal basis for the lawsuit.

Spoiler alert:
On Monday, we’ll talk about partnership agreements, and how they could have saved Eduardo Saverin and the Winklevoss twins a lot of time in court.

Sara Prentice Manela
Editor

P.S. Speaking of Facebook – Have you joined our fanpage?

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