New Law Provides Needed Help to Small Businesses Now and For a Limited Time

After the last couple years of bailouts for financial firms and large manufacturing companies, small business is finally getting some much needed direct relief.  President Obama signed into law this week the Small Business Jobs & Credit Act of 2010, which aims to loosen up credit for small businesses and provide immediate tax breaks to help these companies.  But many of the law's provisions are short-term measures that businesses need to understand now if they are to enjoy the benefits. Here are five provisions that may be immediately useful for your business:

1. Money to Lenders:  The law authorizes $30 billion of funds to be directed to small businesses through community banks and additional funds to state lending institutions.  This is intended to get more capital flowing and allow small businesses to borrow needed capital at reduced rates.  Check with your local bank to find out more.
2. Start Up Expense Deduction:  For startup expenses of new companies, the maximum allowable business tax deduction of $5,000 is doubled to $10,000.  But this increase is only applicable in tax year 2010.
3. Qualified Small Business Stock Deduction:  If your small business has investors looking for liquidity, now is a good time to act.  A holder of qualified small business stock can exclude 100% of the gain on the sale of stock through the end of 2010.  This was increased from the 75% exclusion that was enacted as part of the stimulus in 2009 (the normal exclusion prior to 2009 was 50%).  This provisions is also only available to Subchapter C corporations (S corporations and LLCs do not qualify).
4. Capital Expenditure Limits.  Businesses that acquire capital equipment any time through 2011 can write off up to $500,000, which is double the $250,000 available under the 2009 stimulus.
5. Health Premium Deduction.  Anyone who is self-employed can deduct as a business expense the amount of health care premiums paid in 2010 from the amount of income that is subject to self-employment tax.  Again, this provision is limited to one year.

These are just a few of the provisions intended to help small businesses.  If you own a small business, which do you think will be most beneficial to you?

REMINDER: Massachusetts Privacy Regulations Launch March 1st. Here is what you need to know.

There are only two weeks left to comply with the new Massachusetts privacy regulations.  And before you think that they won't apply to you, think again. I have written before about the new privacy regulations, which will be the toughest and most aggressive privacy rules in the country.  Even though the process has been long and included delays and adjustments, the regs are finally going into effect on March 1st.  And you don't have to be in Massachusetts to worry about them; the new rules will apply to anyone - whether based in Massachusetts or not - that holds certain information about Massachusetts residents.  As a review, here is what you need to know:

Who is covered?

The new law covers any individual, corporation, association, partnership, or other legal entity that handles a Massachusetts resident's personal information in connection with employment or with the provision of goods or services, as long as that information is not otherwise publicly available.  The personal information described here means a Massachusetts resident's name (first name and last name or first initial and last name) in combination with that resident's Social Security number, a driver's license or state ID number, or a financial account or credit card number.

What is required?

Those who are covered must create a comprehensive written information security program (a "WISP") to safeguard the information.  The WISP need only be appropriate to the size, scope, and type of operation the person or business is engaging in, the amount of resources available, the amount of the stored data, and the need for security and confidentiality, but that still means that most people will need to make some adjustments. Your WISP must cover:

1. Designation of a someone to maintain the WISP.
2. Identifying and assessing reasonably foreseeable risks (both internal and external) to the confidentiality of the information whether on paper or electronic, and continually evaluating and improving the effectiveness of the safeguards through employee training and means of detecting and preventing security system failures.
3. Developing security policies for the way the information is stored, accessed, and transported outside of business premises, and especially for the way the information is stored or transmitted on computers or wireless systems, including email.
4. Imposing disciplinary measures for violations of the WISP rules.
5. Taking reasonable steps to ensure that third-party service providers are capable of maintaining similar protections and requiring them by contract to implement and maintain appropriate security measures.

What kind of protection is necessary?

For paper records, you must provide for secure storage of materials containing personal information, such as physical restrictions (e.g storage in locked storage facilities or containers) and limiting access.

For electronic records, the WISP must include, to the extent technically feasible, a system to secure control of user IDs, password selection and control, and restricting access to active users.  In addition, all electronic personal information transmitted wirelessly or across a public network, and all personal information stored on a laptop or other portable device must be encrypted.  It is important to note that encryption for this purpose does not mean password protection; the regulation requires the information to be transformed into a "form in which meaning cannot be assigned".  In other words, the information must be unreadable.  Password protection alone does not satisfy the requirement.

Are there standard procedures to follow?

The quick answer is no - each person or company needs to come up with unique procedures and safeguards that are both reasonable and feasible for its specific operation.  A large company will necessarily have more detailed procedures than a smaller company, and one industry may be held to a different standard another on a case-by-case basis.  Your current procedures may be a good starting point and may, in some cases, already comply with the new requirements.  There is ambiguity in the law's use of the terms "technically feasible" and "reasonable" that leave latitude for the specific terms of compliance.  Some of these will be clarified over time through lawsuits and enforcement actions, which simply reinforces the need to re-evaluate your program over time.

However, that ambiguity should not be confused with making compliance optional.  There are real consequences including lawsuits for breaches and in some cases civil penalties and fines imposed for each violation.

The bottom line is that you need to take this new Massachusetts law seriously, even if you are not in Massachusetts.  But you can mitigate the risk by establishing these minimum standards to safeguard the personal information and prevent unauthorized access.

Here are some additional resources for information on the regulations:

• Text of the Regulation (201 CMR 17.00)
• Frequently Asked Questions about the Regulations
• Compliance Checklist by the Massachusetts Office of Consumer Affairs and Business Regulation
• Small Business Guide for Formulating a WISP

Can Law Firms Act Like Startups?

Listening to a great webinar by Brian Halligan and Dharmesh Shah about "Money, Marketing, & Management with the HubSpot Founders", I was reminded about a discussion that has been floating around the Web recently and on this blog as well.  Can law firms act more like startups? One of the themes in the webinar was how companies (particularly a tech startup like HubSpot) should change the typical management philosophy in order to grow and thrive.  Among other things (and to paraphrase a bit):

1. An organization should break down the pyramid and flatten the org chart.
2. Extend the "open door" policy to eliminate doors altogether.
3. Trust your employees and don't try to over-structure company policies.
4. Be transparent and include your employees.

So everyone sits together and moves around every three months.  Online collaboration tools allow employees to contribute to tools, products, and presentations.  Employees are given latitude and flexibility, drive productivity.  These things work well in a tech startup where the emphasis is on agility and growth, but does that lend itself to a more "traditional" setting like a law firm?

Why not?

Large law firms have traditionally employed a pyramid structure - from the large pool of new associates at the bottom up to the few very managing partners on top.  Nothing is transparent and firm policies are monitored very closely.  Deals at large law firms get staffed with a range of partners and associates, which is sometimes more beneficial for the growth of the law firm (and higher bills) than for the sake of the deal.

Recently though, driven in part by a changing economy, clients, VCs, and even lawyers have reacted negatively to this seemingly outdated structure and have called for some changes.  As companies evolve, shouldn't their law firms?

I have seen a number of new firms pop up in the last few years that seem to embrace this new model - my firm, Trinity Law Group is one of them - by leveraging technology to focus on clients rather than high-rent office space, billable hours, and expensive marketing.  By emulating the companies we represent, law firms can provide better value while adapting to a 21st century business model.

What do you think?  Have you noticed a change in they way you interact with your lawyers?

The Innovation Economy Starts Now

2010 has been the bright spot in the future that we have been looking toward for the past 18 months.  When the bottom started falling out in 2008, the immediate future looked abysmal, but we knew that at some point, things would have to turn around.  When you recall that some of the country's great business successes were born out of economic slumps, this recent downturn - the Great Recession or whatever you want to call it - could transition into the most striking growth in more than a generation. Tom Friedman's recent Op-Ed in the New York Times is a call to kick-start a 21st century innovation economy.  He is right that the time is now.  Think of all of the under-utilized talent in the country right now, not to mention the capital waiting on the sidelines.  Lab Day and the NFTE are ways that the country can and must continue to develop the entrepreneurs and innovators of the future, but while real education reform based on innovation is critical to long-term success (both my parents were educators - my dad for 42 years - so I believe in the importance of education), there are many things that we should be doing on a much shorter runway.

Here are three things that may help:

1. The Start-Up Visa.  This country needs to embrace innovation by bringing here and keeping innovators.  The startup visa movement is about making sure that technological innovation and the "expanding of the pie" happen in the U.S. In addition to recruiting entrepreneurs and giving them the resources they need, we should raise the HB-1 visa limits to bring more skilled workers that will be needed.  Giving visas to those who will create new companies does not take away opportunities for Americans - it expands the pie here to create more American jobs rather than allowing those companies to be created elsewhere.  In this regard, the U.S. is lagging behind China, India, and Pakistan, but even behind countries like the U.K. and Canada.
2. Green Card Diplomas.  The U.S. also needs to reverse the increasing "brain drain" of bringing in and training foreign nationals on student visas and then requiring that they leave the country.  On the contrary, we should actively recruit the best and the brightest from around the world, invite them to our higher educational institutions, and then grant them the right to stay in the country if they start businesses and innovate.  In the words of John Doerr, billionaire venture capitalist, we should "staple a greed card to the diploma" of these students and get them to set up businesses here.  Already, half of the Silicon Valley startups are now started by immigrants, including such pillars as Google, eBay, and Yahoo.  We should continue to encourage this kind of innovation.
3. Government Investment in Innovation.  Government is not a great source of innovation.  But proper government policies can encourage the type of innovation that will grow the economy.  Eliminating capital gains tax on qualified small business investment and giving tax credits for hiring employees is a start toward general economic stimulus, but the administration should also be focused on finding new ways to fund innovation directly while also staying out of the way.

"Is VC Past Its Prime?" or "Five Things I learned at the MIT VC Conference"

The keynote speaker at the MIT VC Conference, Alan Patricof of Greycroft Partners, was clear:  venture capital funds are getting 'inappropriately' large and change is coming.  Mr. Patricof is a legendary pioneer in the VC world (but note: while he is fine with being termed a "generational figure", compare him to Bono or Sting but never Tony Bennett), but the current market is not sustainable.  Because of the investment metrics and their need for certain returns, LPs writing larger checks means that VCs are forced to make larger investments into companies that don't need that much money.  The prevailing winds in the VC industry are heading toward capital efficiency and VC2.0, which he summed up as: "small is beautiful".  VCs, said Patricof, need smaller, more targeted investing; smaller funds will find the most success in this economy. Overall, the MIT VC Conference was, in my view, a big success.  MIT always does a great job bringing together talented and accomplished speakers and attendees to advance learning.  And it is always good to reconnect with friends in the industry as well as new many new faces.  While I could go on at some length about the information presented at the conference, here are a few points that I thought were valuable:

1. Capital Efficiency is Key.  As Alan Patricof noted in the keynote, which was echoed by several of the presenters, the trend of ever increasing VC funds is not sustainable.  Oversized funds investing $20-50MM in companies will become the exception rather than the trend.  The current economic environment will force VCs to focus on targeting their investments and using more discipline.  That could be good news for early stage companies.  I will note that not all of the VCs on the panels agreed that funds are too large.  Some argued that they invest their funds in different ways, or have founded new efforts like Dogpatch Labs or Start@Spark to bring seed capital to startups, but nonetheless did agree that the market is applying new pressures on VCs.
2. Will This Bring New Relief to the Funding Gap? The effect of this pressure on VCs in relation to angel investors was touched upon at the conference, but will likely be looked at in more detail as the market develops.  As VC funds increased in size over the past few years and angel investors increasingly formed angel groups to invest larger amounts, a capital gap increased for early stage companies struggling to locate seed funding.  If VCs retreat to smaller funds, angel groups may have to do the same, which may alleviate the situation and provide much needed seed capital to entrepreneurs.
3. Entrepreneurs Need to Focus on the Problem.  More discipline in the VC market means that entrepreneurs will need to be ready.  As Rich Wong of Accel Partners noted, it is not enough to pitch the next best thing as a solution - VCs need more than just a cool app.  To paraphrase, "entrepreneurs need to spend more time on articulating the problem rather than just pitching the solution".  If you are not focused on solving a problem, your solution will come up short.  True.
4. Mobile Hardware Doesn't Matter.  An interesting discussion about the future of mobile devices showed that in the greater scheme of things, mobile hardware design is not the future - unless of course it solves a new problem.  Humphrey Chen of Verizon noted that it has 66 mobile devices in its catalog, each of which is pretty similar in functionality in relation to its competitors.  But that means there are 66 different ways for which developers have to design solutions.  That is not sustainable.  As mobile communications develop and people begin to move more services into the cloud, your mobile device will not matter as much.  It is the software that will drive innovation.  But even there, where apps are currently selling for an average price of $2.78, innovation is needed to propel the industry forward.  John Backus of New Atlantic Ventures noted that the current "chaos in the mobile market is a great fertile opportunity for entrepreneurs".
5. Be Bold, Fail Fast.  ChaCha CEO Scott Jones presented important tips for entrepreneurs to remember: you have to be bold in your vision and be sure to fail fast.  Don't be afraid to try new things.  If they don't work, stop doing them.  But also be willing to come back to them later - maybe it was the timing that wasn't right.  The key is that entrepreneurs need to be focused on solving problems and taking risks to provide the right solutions.
6. Oh, and Hubspot can really throw a party.  Thanks Brian and Dharmesh!

What do you think?  Is venture capital working for entrepreneurs?  Can something new provide a better solution?