All Posts

#33 – Dain Dulaney, Bishop, Dulaney, Joyner & Abner

April 4, 2020

In this episode John interviews Dain Dulaney, partner at Bishop, Dulaney, Joyner & Abner. Dain is an attorney focusing on startups in Charlotte. In this episode he discusses legal mistakes founders make, investing in companies, raising capital, selling companies, legal entity selection, the key to writing a good Operating Agreement, and many other interesting topics related to the legal side of startups. He also gives great advice on hiring the right law firm.


Full Transcript
Ep #33 Dain Dulaney

Please Note: The Defiance Ventures podcast is designed for audio consumption. If you are able, we strongly encourage you to listen to the audio, which includes tonality and emphasis that’s not on the page. Transcripts are generated using speech recognition software and may contain errors. Please check the corresponding audio before quoting in print.

JOHN ESPEY:
All right. Well, we will get started in one, two, three. Hello folks. Welcome to the podcast. I’ve got a great interview linedup today with me in the studio is Dane Dulaney. Dana’s a partner at Bishop Dulaney joiner, a law firm here in Charlotte. This is really a two for one interview because not only is Dane a founder in his firm, but he also specializes in startups. So I’ve got a lot of questions on, on both of those that I want to get into with them. Dane, thank you so much for joining me today.
BISHOP DULANEY:
Glad to be here, John. We’ve talked a lot of time, so it’s good to do this a little more formally. Exactly.
JOHN:
That’s what I tell people. The best part about doing this podcast is I get to sit down with people that I admire and spend anhour, hour and a half with them. And it’s very rare that you get to do that. So thank you for that.
BISHOP:
Nope. It’s equal. Glad to have you get a chance to talk to you about these things. Awesome.
JOHN:
So how did you get into working with, with startups?
BISHOP:
So I got into it because in the nineties I went in-house with tech companies in 91, believe it or not. And tech companieswere a new thing back then, but I stayed with technology companies all through the nineties. I was last general counsel ofa publicly traded company and South park. We did year 2000 work, which was kind of interesting. And we grew thecompany up to 300 employees and a hundred million in market cap and all the way down in three years. Wow. It was afun ride. And since that time I’ve started two small firms, I think it’s a good structure to help the startups and continuingwith that today.
JOHN:
Great. So do you still have both firms or just Bishop Dulaney. Bishop. Okay, great. So, so what percentage of yourbusiness is early stage companies? Would you say?
BISHOP:
I’d say it’s about 60, 70% of my business. I work mainly representing founders and companies that are trying to grow, butI also work with investors and then the other portion of my business is mainly merger and acquisition work.
JOHN:
Great. I know I’ve worked with you on both sides of the equation, both the th the startup and the founder. And as, as aninvestor, when you talk about merger and acquisition, is that more your clients are buying other companies or is it yourclients are selling or I’m guessing it’s a mix of the two
BISHOP:
Very much a mix. I mean, you know, there are companies that then there was one last year that had an exit that I started itfrom when it started and took all the way through the sale to a put large publicly traded companies, which is fun to watchit go from kind of cradle to grave in that way.
JOHN:
That, that is that’s really exciting. Was that a Charlotte based company? Yeah. Okay, cool. Cool. It’s always exciting to seein Charlotte because we don’t have a lot of those kind of exits to talk about that. That’s awesome. What do you think arethe most common things you do for your clients?
BISHOP:
You know, it’s really a pretty wide variety. You know, it starts with trying to get the owners together and understand theirownership and the management, and then pretty quickly, it goes in to help them with customer contracts and trying togrow the business and employment, just other dispute issues that come up, helping them structure, equity incentive withthese high growth companies that very quickly becomes important, very important, because they’ve got more equity thanthey do money. So they need a way to try to incent people to continue to work with them where they can’t pay him thesame salaries that somebody may be across the street.
JOHN:
Yeah, that’s a very important currency for a lot of startups. It really is. That’s great. And what I’ve always enjoyed aboutworking with you and your firm is you’ve got opinions on the business thing, but you’re able to separate, this is businessadvice I’m giving you, and this is legal because sometimes we just need legal advice from in other times we need thebusiness advice. That’s exactly right.
BISHOP:
And, and I, and I’ve done this long enough where I’m certainly humble on the business side and the legal side in that, youknow, I want to listen to the founder, understand what they want to do and help them from a legal perspective, get wherethey need to go. I’ll give my opinion, both on the legal and the business side, but I’ve also been wrong before on thebusiness side. And I’ve watched people just do great when things I wouldn’t never thought work. And it’s so fun to watchthat, but I’ll, I’ll, I will give my opinions, but I’ll listen to.
JOHN:
So how would your answer to the most common things you do for your clients change for different size clients or are theypretty much the same?
BISHOP:
No, it’s pretty similar for different sized clients. That’s one of the things with my background that I can do is I can kind ofstart with a company from a pure startup to people that are getting together, trying to grow a little bit and just start aconcept to growing with them through seed and a and B rounds, and then go on from there. And for the most part, youjust get into more complexity as you get larger and you get into broader issues, but in, in general, all, and certainly a largeportion of my companies have some type of technology base. And that drives a lot of complexity that it doesn’t matter thesize of the business, but it does help knowing it up and down the chain. Cause you can help them prepare, okay, here’swhat we’re going to do here. But when you get to the next step, you’ve got to think about this. Yeah.
JOHN:
Yeah. That’s great. And obviously, as they grow, it grows your fees. That you’re
BISHOP:
<inaudible>, if I can grow my business and my businesses, I know it will come back and help me.
JOHN:
So in your mind, what are the top things someone should look for when choosing a law firm and should they only bechoosing one? It, it, that’s
BISHOP:
A very dependent question, but the real answer is what the main thing they need to be looking for is somebody that’sgonna listen to them, understand their goals, and then be able to answer questions, to help them meet those goals, whatever they are. That goes back to that last question we were just talking about. Sure. And I, it really it’s for myself. Ihelp companies with a pretty wide variety of things from the background that I have, but I’m more than willing to bring inthe right attorney to do it. No matter what the issue is, even if it’s not somebody from my firm or even somebody from asmaller firm, it could be a large firm it’s I just helped somebody bring in a group that was a, an attorney really from a largefirm who was really a specialist in working with sec issues and broker dealer issues, which is a really kind of a, that’s avery specialty type law. Sure.
JOHN:
Yeah. That seems, it seems like something we’re having expertise, whether it is
BISHOP:
Yeah. I know generally how to help with a lot of things, but there’s certain things that are like bringing the experts onmyself.
JOHN:
And I know in the past in working with you a lot of times, when it starts to feel like it’s something that could go tolitigation, you’ve got partners that you like to work with.
BISHOP:
That’s right. And that’s what having worked here for the last 30 years. And I, and I’m from here as well. I know who elsein the community does good work with whatever stage company is and whether it’s a startup or if it’s a larger company, the answer is all may be different depending on where they are in their growth.
JOHN:
It’s interesting because I’ve never really thought of it this way, but it’s almost what you hear. People say I’m a fractionalCFO or a fractional CTO. It is almost a GC on demand.
BISHOP:
Right. And that’s what I tell my clients, I’m the outside counsel for them. And I ask them to call me about any legal issuethey have. And if I can’t do it, I will help them get to the right attorney. Even if it’s something, you know, like a personalinjury question or we’re divorced, I work with all the, you know, I know I’ve got friends in, in all those areas and helpthem make sure they get their legal needs taken care of.
JOHN:
That’s awesome. So I think I know the answer now that you’ve, you’ve talked through that, but how do you go aboutcompeting with larger firms?
BISHOP:
I think that the, the structure of a smaller firm works better for working with startups. The fees structure is obviously alittle bit better for those that have startup attorneys that have done this a long time like myself, we can, we’ve done somuch of it. We’ve got the documents to be able to do it pretty efficiently. And so it’s, it’s less risk than it is with a largefirm where the partner may not have as much control about who’s doing all the work and trying to get it all collected. Gotit.
JOHN:
That’s why I’ve continued to work, work with you. And even in firm that we’ve scaled like level, we were able to, youwere able to grow with us and help us at the very beginning, but even in the, in the later stages, what advantages did thebig firms have over you? Like the was a specialization
BISHOP:
In certain areas and that’s, and there, I mean, there are some really great attorneys that work at those firms. It’s just not, they’re not built to work with the small startup or even a mid-size startup. They’re built to work with the banks and therates reflect that. And so while I’m not inexpensive people of getting bills from large firms and they really start taking adeep breath and looking at it,
JOHN:
Some of the re, and again, I think your rates are very, very fair. They’re fair to you, but they’re, but they’re, they’re, they’revery fair to the, to the client. But the thing that drives me crazy is when you see rates that are sometimes 50% higher andthere’s two or three of these guys on the phone and I’m like, okay,
BISHOP:
What is this costing me? That’s all you can really think about when that’s going on. Yeah.
JOHN:
The thing I’m not worried about every six minute increment with when I’m paying one person your rate, but when it’sthree guys, those New York attorney rates, it adds up quick on the flip side when I’m negotiating with the partner and I’vegot three. What I know are very high paid lawyers, I feel like we’re at an advantage because the cost.
BISHOP:
Yeah, no. And it’s so funny that it has been my experience for the last 20 years being out in smaller midsize firms is that alot of times it’s me against a wall or me and an associate against the whole cadre of attorneys and we’re, and we’re, if notrunning rings around them, certainly holding up with them just fine.
JOHN:
Absolutely. So as the nature of your client base changed through the years,
BISHOP:
You know, it really hadn’t, it it’s it’s I came out, you know, to work with startups and then help them grow and move alongwhere it may have changed. Some is that is Charlotte’s ecosystem has grown. I have started getting competitors in town. There’s some other, very good startup attorneys. And I, I think one of the differences I have, I have a little moreexperience with the later stage companies and they do.
JOHN:
That’s great. So now I’ll shift to startups again, cause you’ve, you’ve worked with so many, I guess, first off, what’s thebiggest mistake you think first time founders make
BISHOP:
The biggest mistake. And I, and I see this pretty regularly is they don’t think they need an attorney at all. And they goonline to legal zoom, or they just do stuff. And they cobbled things. They fall to get fined on the web together. And thatjust becomes a real problem because then I not only have to fix it, but I have to go back and unwind what they did andthen do it correct the second time, which actually in the end, ends up really increasing their expenses significantly. And soI love, I think they, they really need to get a good startup attorney and not just a good corporate attorney, a good attorneythat knows the startup world and how to make their way through it. Yeah.
JOHN:
Yeah. And I think that’s an important point. My experience is that it’s much cheaper to do it right the first time then whenyou make get that first VC investment.
BISHOP:
Well, and that’s really, I mean, we’ll go to exit. That’s always, one of my goals is because that’s one of our jobs is to helpthe founders really through the issues, both amongst themselves and then later stage investors so that when those thingscome up at a later time, we’ve already thought through it, there’s something in the documents about it. Or if it’s an investorcoming in after doing around, they go, Oh yeah, all these legal documents look perfectly normal. There’s not stuff thatmakes him go, Whoa, Whoa, wait. What’s that?
JOHN:
Are there things that they ask you for help with that? They probably shouldn’t,
BISHOP:
You know, not, not that much. I mean, if, if they asked me for my opinion, that’s the one thing I have seen a lot ofcompanies and a lot of business models and seen what I think works and doesn’t work. But again, I’m humbled enough toabsolutely see that I’m not always right about that. And I’ve seen people go off into directions and just absolutely kill it, but there are some, some good experiences I’ve learned and can share with my clients, especially again, in, in the kind oftechnology space I’ve seen the business models that work and those that don’t understand why one may work better thanthe other.
JOHN:
Yeah. That that’s always been valuable in our conversations. So I want to talk a little bit about entity choice. What’s themost popular form of entity these days. So
BISHOP:
Most popular form what you’re going to see usually as an LLC for a startup. And there are a couple of reasons besides forthat one is somebody might go on to the web and read about how West coast VCs, when everybody is set up as acorporation from the very get-go. But the reality is in this space and in this area, is that setting up as an LLC gives you alot of the flexibilities, like a corporation, but it allows you to be in a more tax efficient, use your losses that you have,
JOHN:
But then you can always flip it. Cause it’s just an IRS election. Yeah.
BISHOP:
Right. Well, and that’s what, yeah, that’s what you’re not talked to have talked about this before, as I sat up my, a lot ofthese as LLCs, and then later, if they get an IM good investment million dollar investment investor says, I want to wantyou to become a C Corp. You give them a good thumbs up and it’s like a graduation for them because that, that means thatthat are really starting to grow and hit some hurdles. But until that time it’s better to be an LLC. And I’ve got a lot of verylarge companies that are LLCs, lots that have raised millions of millions of dollars. And if they sell before they turn into acorporation, that’s actually a better tax outcome for the owners. Yeah.
JOHN:
Because there’s no double taxation. Right. Right. Yeah. We were thinking at level about flipping to flipping the taxelection, to being taxed as a corporation, we just had nexus in over 20 States and we had all sorts of complex reportingrequirements. And at the end of the day, the, our tax return got to about 3,700 pages. And just being, just flipping to a nonpass through entity would have greatly reduced the complexity, but we had loss and we had, we had accounting issuesthat we wanted to get through before we ride. And that’s what
BISHOP:
It’s always, as long as you’re doing it in North Carolina, there’s some, some States where it’s not as easy to make that flipfrom one entity to another. But in North Carolina, it’s very easy to change entities if you want to. So you’re not making adecision for the rest of your life. And the only other, the, the other structure that you see is setting up people as Scorporations. And that’s a really good structure. If you’re not gonna go out and really try to grow, you’re going to start aretail store and it’s just going to be you or you and your wife is the owner, you and your partner, because there are taxadvantages to that. But there are some major restrictions on your growth. The two biggest ones being, you can’t have anentity as an owner. So like an investment company couldn’t invest in you because you’re an S corporation. And thensecondly, you can’t have preferred stock again, really styling
JOHN:
What sort of stock? Only one class of stocks. And I think I heard you can’t have any foreign nationals
BISHOP:
Foreign nationals. That’s right there. Yeah. There’s the IRS is not going to give you a break on something without takingsome things away. And that’s that, that’s what they take away with the escort.
JOHN:
Interesting. I had never heard that. That was the reasoning for the restrictions on the escort. What is a disregarded entity? Isee that question a lot with two investors at tax time, people say, what is the nature? Is this a partnership, a disregardedentity?
BISHOP:
Yeah. And all it really means is both as an LLC taxes, either a partnership or an S-corporation and an S-corporation, thetaxes, the profits and losses flow down to your personal taxes. And that again, that’s where it’s really helpful as a startup, especially if you’ve got another job or other sources of income and you’re running this company, but you’re losing money. Those losses drop to your personal taxes and actually will reduce your tax burden because they’ll offset that gain thatyou’re that other income you’re getting. Okay.
JOHN:
And I think you’ve already, probably mostly answered this, but why our LLC is good for high growth startup.
BISHOP:
And the answer is a really flexible yeah. That’s really what makes them a good vehicle, I think for a startup. And again, ifyou get to the point where you get a investor that comes in and gives you some money flip to a C Corp in Delaware, and
JOHN:
That was my next question, why should I do that? And that’s typically going to be when you get that, that big investor,
BISHOP:
The reason that they want to go to Delaware is because people that do work like I do like start up attorneys, turnings atwork with investors, we all know the laws of Delaware. And so you can that way you can get an investment from South Carolina or Texas or California, and everybody knows how those are supposed to be structured, how they’re supposed towork. And so that’s the only reason people will ask me that question a lot. I’m like, no, there’s no tax advantages. As amatter of fact, it’s a negative
JOHN:
When they have the court of Chancery or something there
BISHOP:
They have, they have, they have a long history of their courts being able to interpret the corporate laws. So you’ve got areally good body of law, you know, how things are going to be handled. And it makes, it makes it a really great place ifyou’re going to be raising money nationally to be incorporated.
JOHN:
Can you talk a little bit about in your mind, what’s important to put in an LLC is main governing document, the operatingagreement. Yeah. I,
BISHOP:
The operating agreement is really important because as opposed to a corporation that they’re not a lot of LLC laws that areabsolutes, they’re all except, except for in the operating agreement. So that’s really your main governing body documentfor your governance of your company. So you’ve got to set up the ownership. Do you have one class of ownership to getvoting? And non-voting who were the managers? Typically, the way that LLCs are set up is that they have what are calledmembers that are like shareholders. And then they have managers, which are kind of like board of directors and officers atthe same time. And so trying to figure out what, how the ownership is going to be structured, you know, who’s going tohave what percentage and how that works. And then also who the managers are going to be and you know, what are theirmanagement limits and what can they do to really try to keep,
JOHN:
But before it goes to a board vote or
BISHOP:
Right, it has to go back to a shareholder vote because that’s a much bigger deal. And, you know, usually I set them up andmost, most attorneys do these days where the managers have most of the control, but you’ll usually carve out a few majorthings like buying a company, selling a company, selling more ownership, things like that, that you have to take out to theother members. And when you do that, that’s, as you get bigger, that gets to be a bigger and bigger pain. So it it’ssomething that you really have to think about and the investors and the other members have to be able to sign off and feelcomfortable that the managers are doing the right thing as well.
JOHN:
Yeah. These, these are things where my experience has been. And luckily we had an early investor in level who made usthink about a lot of these things and he was adamant about, no, you need to have an operating agreement. That’s writtenfor the kind of company you want to be, not the kind of company you are today.
BISHOP:
That’s really the goal is you write it and you write it. And it, and it is a living document a lot of times, and it gets amendedover time if you, if you grow. But on top of those two things, you really need to think about ownership, what restrictionson transfer. And then if something happens to somebody on an involuntary basis, you have buy, sell provisions becausethe whole concept of an LLC, if it’s tax as a partnership tip, especially is it you’re in business who you want to be inbusiness with. You’re not in business with their wife. You’re not in business with a bankruptcy court that may take overthat ownership. So if there is something like that, that happens that the company and possibly the other owners have achance to buy it back at that time because they, they want to be able to choose who they’re in business with.
JOHN:
Yeah. That’s very important. So you’ve written before about convertible notes as an early stage funding option. Can youtalk about why you like a convertible note? Sure. And I’ll
BISHOP:
Talk about both sides of it there. The negative two for one. Well, it used to be, it used to be that the convertible note was away to avoid evaluation question, but nowadays, almost all investors are going to ask for a cap, which most people equateto somewhat somewhat of evaluation. It’s not exactly, but that’s the way a lot of people equate it. And so if you do that, it’sset up. So that it’s a note and told you hit an automatic conversion point. And the issue I’ve seen over time is if you don’tset it up correctly on the front side and give yourself enough time to grow the company and raise the money that you needto, to automatically convert it. If you get the, to that date where it’s mature and the investors can call the investment, it canbe a real problem. I was you and I were talking about the fact that I had three companies over the last three years haveraised millions of dollars each on convertible notes. And some of those started to hit maturity dates. And two of thosethree companies went under because of the fact that they couldn’t continue to raise money. The people were not happywith it. And they had the ability to call his notes, which led to the shutdown of the companies.
JOHN:
Wow. Yeah. I didn’t even think about that. It’s almost when, when you put in a cap and you put in a paid unkind interestterm and you put in a discount, you, it’s almost a more complex valuation in many ways.
BISHOP:
It is. And if you, if you’re just selling equity and they don’t get the money out, that they don’t want that they want, it’s notgoing to shut the company down. You got to go raise more money and figure out a way to do it eventually, but it’s not, they don’t have the same leverage over the company staying in existence. They do as with a convertible note.
JOHN:
Interesting. Yeah. I’ve always liked them because I do say it’s really hard to add to value is a pre-revenue company inmany cases, but, but you’re right. Like when the way you I’ve seen such a wide difference between caps and betweendiscounts and between the interest that it actually pays, that I could see it
BISHOP:
And it can be, it can bring it pretty good. Cause the investor and I have written about this, the investors, they not only gettheir principle, they not only get it, what it will convert in, which is usually around a 20% preference, a very strongpreference, a 20% preference, but they also get that interest. And if say it’s a three-year note at 10% interest, that meansthey get another 30% because it, it over that time. So it, it, it’s not a bad investment vehicle. You just have to be carefulthat you’re structuring it. So, you know, if it comes to that maturity day, what happens in everybody can figure a way out. That’s good for both the investors and the company.
JOHN:
Excellent. Thank you for that. Why else is it good to have an attorney that knows the various investment structures to helpyou with financing? Many people would think that’s more of an accounting question. Well, and I do work very closely
BISHOP:
With a lot of accountants, both from just the accounting side and from the tax structuring side. But one of the key thingsthat I think it’s most helpful to have an attorney that understands investment investment structures, and especially howthey look going down the road is that you have somebody that can look at them and say, John, that’s a pretty normalprovision. I know you don’t like it, but that’s, it’s okay. That’s going to be there. They’re not going to back off of that. Andthat’s normal.
JOHN:
That’s 90% of the reason I hired you, Dan, is because I hate reading legal documents and you’re like this, you need toworry about these two or three. The rest of this is just bullshit,
BISHOP:
Right? And that’s what, and you look and you look at it and you go, these things are important and you need to thinkabout it. And here’s why you need to think about it. Here’s what can happen down the road. But probably just as equally isthese are all things that the next investor coming in, the next person who may acquire your company after this investmentwill come and look at these things and go, those are all pretty normal things. We understand how that works. Let’s notworry about due diligence further on this. Let’s move on towards trying to get the investment done.
JOHN:
Okay. I want to pivot or change. Switch gears here. Again, say your company gets to a stage where it’s ready to be bought. Can you speak to an asset purchase versus a stock purchase when someone is buying a company and I realized there’s taximplications that you may not be as qualified to speak about, but there’s also legal ramifications as well. Yeah,
BISHOP:
There are. And you know, there’s, there are some pretty significant tax differences between the two, especially dependingon if you’re an LLC versus a corporation, but one of the key things with the asset sale buyers like those typically, becausethey get rid of all the unknown liabilities of the company and they leave those with the current owners,
JOHN:
But that in an LLC that in a C corporate, that triggers a double tax. Yeah.
BISHOP:
Right, right. If they sell right, a C Corp will have double taxation for the owners of the company, which unless they selltheir SOC, but in an asset sale, which is preferred there, that’s, that’s the way they’re going to go about it. And the otherthings we look for.
JOHN:
Oh, got it. Well, I know that when you and I talked in the pre-interview, you said that there are times when a stock salemakes more sense, right. It’s always a better answer for the seller and that must be related to it.
BISHOP:
Yes, it is. Cause one, one of the big negatives with doing an asset sale is that you have to get assignments of contracts, oftentimes, especially if you’ve got large customers and that can be really hard. Or if you have licensing issues or if you’vegot a company that people really want in your corporation and you can sell the stock, it’s a much better tax issue for youbecause of that double taxation issue. And really, cause it’s just a, it’s all going to be capital gains. If you’re able to sell thestock. And it’s a little bit smoother. The buyer on the other side of it is looking at it and going, wow. If I buy a stock, I’mtaking all the good and bad of that company, no matter what comes out of the longer diligence it is because it’s going tobe, you know, whatever comes out of the woodwork later, I’m going to be on the hook for, and even though I may havethe right to go after the person, I’ve really got to think about it.
JOHN:
No, it, it, it is an interesting one. And, and as, as you know, I’m in the process of acquiring a company right now and we’redoing an asset sale. And it was for a lot of the reasons that you just talked about that we chose that approach, but we wentthrough the contracts and it looks like even with an asset sale, it’s, it’s, we’re going to have to get consent from the existingcustomers to renew anything.
BISHOP:
Typically that’s not that big of a deal. There may be some pushback from some certain customers, but usually that’s notthat big of a problem. And it’s one of those things. If worst came to worse, you could always flip it over to a stock sale ifhe had to. But yeah, the only time I’ve seen it happen once or twice where it was just an absolute issue and you just haveto be able to work through it, but it is part of the process and it does make the process longer.
JOHN:
So we talked a little bit about owners making acquisitions in that discussion. What are some common mistakes you seeowners make when they do acquire companies?
BISHOP:
One of the biggest ones I say there’s two big ones that I’ve learned over time. One is the giving them all the money upfront. I’m going to buy your company. I’m just going to give you all this money and you can walk away. I like to keepthem on the hook, especially in a relatively short period of time, 12 months, 18 months through either node or some typeof earn-out. So that if something does come up, you have a way to get to that money without actually having to Sue themhopefully, and be a way to actually
JOHN:
Where they reserve money in escrow until a certain period.
BISHOP:
Right? And so you reserve part of the price to make sure that things are, as they say. And so that they’re incented to helpyou do that. The other thing is a really a non-legal thing. And it’s just making sure that the group you’re buying it from istrustworthy. And I don’t know how to say it any other way than that, because I’ve seen most of the really bad situationsI’ve seen come up. The people thought that the people they were buying it from were not particularly ethical and they, wecouldn’t find anything. And some, some high-level due diligence and they’re looking at the company, but as time camealong, stuff kept coming up. That was always problematic. And then we’ve got to deal with it on the backside. And even ifyou have the right to go after him, it’s not just an automatic, right. You’ve got to bring a lawsuit, you’re going to spendsome money. You’re gonna spend some money. It’s going to be painful for everybody. And so I think really, if you’re themore comfortable you are with the ethics and trustworthiness of your buyer, the better it is.
JOHN:
I think that’s a great advice in most things related to business, a true, true. If you don’t, if you don’t trust them, youprobably need to run the other way. And my business partner that I’m making this acquisition with, we have a role for ournew business, which is don’t bring anybody on that. You don’t want to go have a beer or a coffee.
BISHOP:
That’s right. That’s exactly it. So w w
JOHN:
How would your advice change if you’re advising the seller? Would it be the exact opposite advice of when your advisoradvising the buyer mistakes?
BISHOP:
To some extent it is, and it is a little bit, it is get as much money because what you don’t, what you don’t want is to have alot of money hanging out there that you’ve got to collect from the person. Cause kind of the flip side. If you have to gocollect it from them, there’s no automatic, there’s no automatic way I have for you to get that money. You’re going to haveto ask them, ask hard. We can create hooks into them to make it, give, incent them to do that. But in the end you may haveto Sue them to try to get it. And it’s, that’s really important to try to make sure you’ve got that money up front as much aspossible.
JOHN:
No, I think, I think that’s great advice. Can you speak of different sorts of equity, incentive plans? And this could be eitherwhat we’ve just been talking about from an acquisition perspective or just the equity incentive plan that you’re defining fora founder when they want to use that currency that you talked about. That’s cheaper in the beginning. Although if you getto be a big company, that currency becomes pretty expensive.
BISHOP:
It does. And that’s in, that’s really important because I think one of the things that I’ve learned over time is that a founder, the first time founder wants to give everybody equity because they don’t have him cash a second time. Serial entrepreneurholds on to that equity. Like it, it like it was their child because they know that that’s really where they make the money inthe end.
JOHN:
And the second time the serial entrepreneur finds it easier to raise money.
BISHOP:
That’s true, easier and cheaper to raise money. They’d rather give away the cash instead of the equity. Right. And that’swhat I, but I do talk to my clients a lot that there’s a balance there that they really need to think about and not just throwequity at people to try to get them to come on. And the equity plans. There’s, it’s interesting because it’s an area that I do alot of work. When I first got into it, I learned how complex it was and it runs across a lot of legal areas. But theimportance, one of the main things you gotta worry about is the tax impact of it. Because if people are like, well, I’m justgoing to give this person part of my company. I’m like, well, you just sold part of it at a million dollar valuation giventhem money.
BISHOP:
Right? And the IRS looks at that instead of giving them salary, you’re just giving them compensation. So they’re going tobe taxed on that and guess what? There’s not money out there to care for them. Right? And so that’s why you see optionsor profits interests often, because it’s a way you can give ownership somebody, or you can grant ownership to somebodyin a way that they don’t have to pay taxes today. And, and the company doesn’t have to pay taxes today, but if they’resuccessful down the line, they would have the opportunity to participate in the upside of it as I go down the path.
JOHN:
Yep. I’ve used both of those. What are your thoughts on profit interest versus versus office?
BISHOP:
So in an LLC, there is a way to, and taxes a partnership. There is a way to do profits interest and it’s, it’s another form ofequity that you can give. And it is important because it’s economic interest in Pinterest, right? It’s really an economicinterest to it. It’s just, you get the right to participate in profits of the company. I’m actually dealing with a, a reallycomplex situation right now, but the options and the problem with an LLC and the profits interests are they becomemembers, which affects their ability to take salary, which affects their ability to get benefits. And so I have actuallyshifted over time from profits interests, usually to more, you can do options in an LLC. Like I said, that’s the nice thing. It’s really flexible. And it’s a way to get equity. Somebody where they don’t have tax impact now, but give them someupside as they go down the path. Now, the other thing that I have, it’s funny in the, in the last, probably 12 years in, in, before the last year and a half, I probably had done three or four would have called Phantom equity plans and theirdifferent structures for those. But I’d probably done three or four and I’ve done seven or eight in the last year and a half. And I think that’s because of the, the economy being the way it is. And everybody really needs a way to incent theiremployees, even companies that didn’t think they used to need that.
JOHN:
And how, how has a fandom cause my understanding of a Phantom grant was that you would do an option and maybe thiswas just a place holder I put in my brain, but you do a, an option or profit interest grant, but it’s, it only, it only has anyimpact on a ch it only vests on change of control. And so I always thought of that as a family,
BISHOP:
We can set them up so that it’s annual too. The thing is a real answer. They’re just bonuses. They just sound fancy. It’s justfrom the IRS, looks at it like a bonus. So it sounds fancier and it makes people think maybe I have kind of an equityownership, the reality it’s, it’s,
JOHN:
It’s literally just paying a percentage of the profits as a bonus. Right.
BISHOP:
Right. And, and, and both of them are going to be taught, not taxes though. You’re an owner. So it’s really, the IRS looksat it and says, well, that’s just a bonus plan, but you can make it sound really cool. But with the documents and it is way toget somebody part of an ownership. I had the, probably the biggest one was an S-corporation that sold for eight figuresthat had had a Phantom plan in L and a lot of people up and down the line in that company were able to get pretty goodmoney out because of that.
JOHN:
That’s great. Do you have an opinion? And I think you sort of answered this before, but you may have a deeper opinion onit, but whether founders tend to give too much or not enough equity to their key employees,
BISHOP:
Usually it’s too much up upfront. And I, and I usually have to talk them down.
JOHN:
What do you think is too much? I realize it probably depends on the situation, but yeah.
BISHOP:
Well, the real issue is if they’re bringing in somebody really important, like a, a CFO level or a head sales person, that’swhere you typically really get into this discussion. And even with that, you’re not giving it to them all up front. Usuallythere’s some vesting involved. And so you’ve got the opportunity to say, and, and there’s some back and forth with thatperson. Cause they’re probably a little bit more sophisticated and have a little bit of knowledge of this too. And so you cansay, well, I’ll give you, you know, 5%, 10%, depending on the stage of the company and where they are, and then say, I’llgive you that much. But you know, it’s got a vest over this period of time so that I make sure that you’re there it’s possiblein certain situations to have other triggers other than just time vesting. But the reality is the time vesting is if they’re goingto good, they’re going to still be there at the time. That’s and if they’re not, they’re probably going to be gone. Yeah,
JOHN:
No, some of the best advice I got early on at level was I was trying to hire a head of sales. And Chris Halligan told me, he’s like, look, if you, my, my biggest suggestion is treat this person like a partner and give them real equity, make it vest. He’s like, whether it’s over a period of time or whether it’s over some revenue targets, but if you, if you can’t and he, andhe said, make it meaningful, make it five, 6%, which has meaningful equity. And, and, and he said, if you can’t bear thethought of doing that, that probably isn’t your head of sales. Right.
BISHOP:
I talked to people all the time. I think that’s the hardest thing to hire for, because if they’re a halfway decent salesperson. Right,
JOHN:
Right. Very interesting. So do you have any advice for people who think about giving equity to every employee? Becausethat seems to be popular in some circles and not in others. And I’ve got my own account,
BISHOP:
Right. I, I, you know, my, my opinion on generally, no, but again, this goes back to the Canyon, Payam it depends on ifyou’re, if you’re trying to grow a company and you’ve got a lot of employees and you can’t pay them all market wages, itbecomes a real pressure on your company. If you everybody’s getting pulled out because they’re getting paid 5,000 moreby somebody down the street. I typically am not a huge fan of that, but I certainly see the reason for it and like to leave itin the discretion of the person running the business, because they know that business and they know the situation betterthan I do
JOHN:
My experience. Wasn’t very few people really know how to value that equity. And I remember having conversations withpeople where we had raised money at five or six X, the price that a share was granted or a unit was granted to them. And, and they’re complaining about a $5,000 raise or lack of a $5,000 raise. And I’m like, really, are we having this?
BISHOP:
I watched this all the time. And, and it, in different markets, I have people in the marketing and digital marketing space. Those people move, move quick. So you, it depends on who they are and the space you’re in.
JOHN:
Yeah. It’s one that, I’ve my, I really have evolved my opinions on that one. I used to think that you should makeeverybody. And now I even think that it should be the minimal group of people who are truly 100% committed to thisthing,
BISHOP:
Right. Who were really contributing to. And if it’s somebody you can’t, you really would hurt you if they lose, they reallyprobably ought to have an equity. And cause the whole idea of it is you’re trying to make them think like an owner andthat their, their, their success is tied to the success of the company. So that if, if they’re working to make everybodysuccessful and they’re successful, they’ll make some money.
JOHN:
Absolutely. And I guess it really is just the question of, do they understand it? Which may have been more on me notcommunicating it or explaining it correctly?
BISHOP:
Well, there there’s. So what, you know, essentially what I’ve done over time is I put in different levels of plans at largercompanies, there was a company, the technology company had a hundred people, a hundred people in it. And so for ahead of sales, we put in a true equity grant at the next level we put in a Phantom stock plan. And the next one, it was like, why don’t you just give them annual bonuses, skim. Okay. If you have a, you know, a hundred thousand in profit, givethem 2% of the profit. Yeah,
JOHN:
Yeah, no, I like that approach for sure. So you hinted at it a little bit earlier, but I want to shift gears to Charlotte. Whathas changed in Charlotte through the years, in your mind, specific to the tech and the startup scene?
BISHOP:
It’s been unbelievable. I mean, I have been around the Charlotte startup scene since the early two thousands, which isthere wasn’t a Charlotte startup scene. I started, we all knew each other very well because there were only dozens of usrunning around then
JOHN:
Dan Roselli told me in an earlier interview, he said it used to be. And when you tell someone you’re an entrepreneur inCharlotte, they were like, Ooh, you’re in between jobs at the banks.
BISHOP:
That’s right. And so it’s, it’s just been fantastic. Dan did a great job pulling Packard place and there were a lot ofnaysayers, but it has provided a central place for people to congregate and meet. And it’s, it’s great to watch it really takeoff. It was, it used to be that I knew every company and if I didn’t represent him, I knew him very well and knew theowners. And nowadays I go up there and I like it. See the South last week, there were a lot of companies I’d never heardof that. I was really impressed with.
JOHN:
Yeah. The seed, the South event was really impressive. Thankfully, Sam and Lynn asked me to moderate a panel. Andthen I got invited to participate in another panel. And I was I’m in the scene and I I’m fairly active in investing in thescene, but I was just amazed at how the, of the people that were there, the companies, the investors that are showing up, it’s very different than it was. I haven’t been in it
BISHOP:
Well, even, even in the last five years, 10 years, I mean, it’s amazing in the last 10 years is when, cause it really kind ofbumped along. And then 2008 happened in 2009 and I’ve been telling people at the chamber, they need to pay attention tothe scene. And they were like, the banks are always going to be around. They’re going to be good. And so all of a suddennow they’re like, yay. We love startups. We love the startup scene and entrepreneurs.
JOHN:
Well, and I’ve always said, it just takes a couple of success stories. That’s what you really need a couple of success stories. And then that, that, that convinces the brilliant, you know, the, the, the brilliant developer sitting in the ivory tower atDuke energy or bank of America to go follow her passion. And it’s much easier to do that when you see an avid exchangeor a map, anything, or a,
BISHOP:
And I’ve talked to a few people I haven’t exchanged cause I’m seeing this. I feel like it’s, it’s a vortex. It’s sucking up a lotof talent in Charlotte, which is great. But I have seen a number of people sell companies to actually go to work for them. And what’s going to happen is they will eventually have a, an IPO or some type of sale. That’s gonna throw everybodyback out into. And that’s really a great thing to see. And I think it’ll be great for Charleston.
JOHN:
I came from the DC area and there were a couple of examples of those types of companies. AOL was one that pulled up, hoovered up all the talent that they can get. And these people get to learn how it’s done and they get to build the networkand everything else. And then they, then it explodes and they go invest in companies or start companies because now theyhave capital and know-how, and we haven’t had that. We haven’t had the mega eggs. And I mean, I think MapAnything isprobably been one of the bigger exits in recent times, but I think avid could be at, I think red ventures could be in, I thinkpassport could be it. Right.
BISHOP:
We’ve got it. We’ve got a number that are right there right now. It’s really exciting
JOHN:
Was a fantastic exit to Salesforce for those who don’t know. But I think that, I think we’ve got to get to something that’sdouble or triple the size of that to really move the needle.
BISHOP:
I always used to be my issue. Was it, I didn’t think we had enough mentors in Charlotte and with people like yourself anda lot of other people in Charlotte that that is one of the biggest things I think to the Charlotte community that has changedis, is there, there are people, even if they’re not huge exits, they’ve had some eggs that they’re willing to have the time andthe ability to give back and they’re starting to mentor the startups and that’s where you’re seeing them really start to grow.
JOHN:
I couldn’t agree more. And so do you have any favorite resources or events in town for startups? I think I know cause I’veseen you at a handful of them, but right.
BISHOP:
You know, I really like what innovate Charlotte’s doing. Go to pitch breakfast, spend some time around Charlotte angelfund collective hustle. And what Sam’s doing is, is great missing any.
JOHN:
Nope. I mean, I think bit’s breakfast is where I usually tell people to start. Cause it’s the most obvious and most best
BISHOP:
Well, and I will say the other one that, that I think people forget about is that if you’re really nascent and you’re really justtrying to get into space and don’t know anything about it, it’s got to Meghan cups. Yeah. It’s a good start. Cause that reallypulled you get to personally participate in it at that point. Yeah,
JOHN:
Absolutely. And I think just spend some time at Packard place, they’re going to advertise
BISHOP:
Oh, all the debt and it’s not just the it’s. I mean, there are so many events. I I’m, I just hired an associate recently and wastelling her, I was like, I could go to something every single night if I wanted to, but that was out there to do so.
JOHN:
Not to put you on the spot, but are there any promising young, young startups you’re particularly impressed with
BISHOP:
That’s what am, and I’m interested in your thoughts on this, that the two that come to mind quickly. I think what Skipper’sdoing is great. It’s out of here as far as really earlier stage, obviously people know Peyser and stratify and, and Massportdoes and they know those. And then the like, like the, I think you mentioned stash wealth,
JOHN:
Pre pre is amazing. I, I, and, and none of those are your clients I’d take it, but not that you need it
BISHOP:
Disclose that <inaudible> some of them are, but not all of them. Yeah. Got it. Got it.
JOHN:
And yeah, I think that the one that I would, would definitely add is to you laundry, what Alex said.
BISHOP:
Yeah. It’s great. Yeah, no, I agree.
JOHN:
It’s crazy. I had him on the podcast and I just, I felt like such a piece of shit, you know, he’s 27 years old and look at whathe’s done. It’s good.
BISHOP:
Right, right, right, right, right. He’s done a really good job. And that is hard to believe at 27 days he’s able to do it. Cause Italked to him right. When he was starting up and I was like, boy, that sounds really tough. What you’re talking about, butthey get them out of ties. Right. And they have, they have, you know, they have, they’re like anybody else, includingskipper, they have pivoted like heck over time to make it work. Yep. No, absolutely.
JOHN:
They they’ve been impressive. And there’s one, I’ve got my eye on, I know the founders, not well, but I’ve spoken withthem a couple of times rent ready and they’ve just raised some, some real money. And they’re, they’ve got a really uniquecommercial real estate solution.
BISHOP:
Yeah. There’s a, and like I said, it’s the more we talk about it, the more I could go, Oh, I forgot about this one. I forgotabout that one. There, there are a number that I’m really interested in watching.
JOHN:
There was one that I invested in fairly recently called next bar annex tea bar. It’s a younger guy named Richard. He’sprobably not 27. I mean, he looks, I’m so old now that they all look young, but I would guess he’s, twenty-five maybe onthe high end. And he, he was an investment banker and he advised a couple of very large, like five, $600 milliontransactions of bar companies, health bars to, to, to, to large food, food, CPG companies. And he was like, well, he hadhealed himself through a ketogenic diet. And he said, I’m going to create a ketogenic bar. And I put some money in, youknow, I thought it was a good concept, but it’s also not an industry that I understand, but he, he just in half the amount oftime. So he bought inventory that he thought would last him, I don’t know, six months. And instead it lasted him threemonths and it was the number one product on Amazon in the health categories. It’s just amazing. So I think there’s ahandful of those that are out there, which has really
BISHOP:
Sometimes it’s what you and I know. So oddly enough, I’ve got some investors that I know that invest in the shoppingspace. And so shopping did well at the, at the event last and I, and so I introduced them to this and that these investors, because that’s actually huge space and very few people know much about that space, but it’s, it is really interesting whatthey’re doing and they could find some opportunity there just because of market size. Yeah,
JOHN:
Absolutely. And that’s what I’m seeing when next bar, they, they sign up one whole foods or one delays or any of these, any of these big, big name, and you get a little bit of shelf space, you can go a long way. You really can. And I think thegood kitchen has, has started getting shelf space if not at whole foods than at another big name. And that’s really excitingto see because it is all about that distribution. Do you do early stage investing yourself?
BISHOP:
Not directly. And it’s intentional because I have a lot of clients that asked me, will you take some, you know, will youtake some equity for what we do? Are you gonna invest in us? And I always worried that the investors will look at me andsay, well, it’s he making this decision based on his investment? Or he’s just a true advisor, trying to look out for the best ofeverybody in the company. And I take a lot of risks with these companies as I’m starting to run up bills and, and takinglong periods of time before I’m paid. But I may do that more of that as I get down the path with companies that I’m, I don’trepresent, but not today.
JOHN:
Got it. No, that, that makes a lot of sense to me. Can you comment on any opinions you might have on investing through afund versus investing by yourself or with a small group of friends?
BISHOP:
No. I think if you’re just starting and you’re coming out of a bank or you’re coming and you just don’t know this world atall, I think starting with a fund, whether it’s venture South or whether it’s Charlotte angel fund is a great way to go<inaudible> tech fund. Right. Right. I mean, I think that’s really a great way to go because
JOHN:
Those guys get to see every deal and you may not be able to do that as an individual. I’m very fortunate where I think Isee most deals in town or not most, but most of the deals that I would, that I would want to see. But I think that that’s areally hard, you know, I’ve been in this startup scene for 10 years now, so it’s easier for me to find a deal. It’s funny thatbecause Rob Cummings, who we both know, he, he could do it himself or he could do with a fund. And the reality is hedoes, he does both. So it’s I guess an either or proposition.
BISHOP:
Yes. I, you know, even so, so like Charlotte angel fund, they see a lot of deals. I go to a lot of their meetings. I don’t go inthere and go, wow. Every deal is great. And deal flow as an investor is really the key. I think if you are going to do itindividually and you’re going to try to only invest in one or two, it’s really tough if you’ve got people that, you know, likeJohn, like Rob that know this space have lived the world. It’s a good way to go.
JOHN:
Who introduced you in may? If you can invest alongside a media, Hey, I got, I got a clue for you if he decides to invest, put some money. Right.
BISHOP:
Right. And these are, I mean, it’s just because they have the experience and seeing the good and the bad and the ugly and, and a way to try to figure out what’s going to be, what’s going to help. And I think if you’re going to do it invest, that’swhy the fund is kind of good. Is investing in a lot of the earlier. It is the less chance there is of success. I mean, the earlieryou are, if you’re going to get one in 10, you’re doing pretty good. And it’s a, it’s, it’s hard to tell. Yeah.
JOHN:
No, that’s, that’s interesting. Cause I, I tell people, someone asked me the other day, like, Hey, I’ve got 50,000 that I wantto invest in, in startups. And I was like, yeah, my suggestion is you’re only going to be able to do one or two of those. Andchances are very good that you’re going to piss it away. Why don’t you go take a class on options investing? And that’sprobably a better way to get an alternative investment,
BISHOP:
The funds, because I mean, it’s just, I have seen companies I thought were absolutely no way to miss, just fall apart. AndI’ve seen companies that I thought were terrible. Try to pivot, add people and stuff and just do great. So it’s really tough.
JOHN:
Can you talk to why or why not? You might advise an investor to create their own LLC or other entity for investing.
BISHOP:
Well, yeah. I mean, that’s where, especially if you’re not going to do it through a finding and you’re going to do itindividually, maybe your friend investing in one, you don’t need it because as a passive investor, you don’t have, you don’thave fiduciary duties and obligations to other people that you might have if you were actually working in the company, but otherwise setting up an LLC and then using that to invest in the company does give you another level of protection asyou’re going down the path. And, and you know, these, these companies get involved with lawsuits sometimes because ifthings don’t work out, investors are unhappy and sometimes lawsuits happen. That’s just the, the, the world that they livein. And so that is another layer of protection between you and your investment.
JOHN:
And you didn’t refer to it as GPTP. But I think that was the concept you were talking about where there’s a guaranteedpayment to partner. So if I own a company and I’m on the payroll, I can’t be paid through payroll. I have to be paidthrough GPTP. And, and, and my experience has been that if you own your shares through another LLC, then you getpaid through payroll. Some people prefer GPTP because you, you, you hold your money for a quarter. Right.
BISHOP:
But you’re providing them services. That makes a ton of sense. Yeah.
JOHN:
Yeah. But, but for most people, it’s a pain in the ass to be paid on. GPTP you’ve got to reserve your own payroll taxes. You’ve got to pay your own taxes. You’ve got to estimate your taxes on a quarterly basis. Right.
BISHOP:
Well, and you got to hope the company can at least pay those taxes. Cause otherwise you’re coming out of pocket and youdon’t have any cash to do it. Yep,
JOHN:
Exactly. Exactly. Well, this has been great. Dan, is there anything I haven’t covered that you think we should leave thelisteners with or
BISHOP:
I think we’ve covered it pretty well. I mean, I think, like I said, going back to the very beginning of it, it’s just important toget somebody involved early in the company from legal side that understands the stuff that can help you out. They don’thave to be the biggest firm in the world and help you through every question. But there are a lot of good startup attorneysin Charlotte that can help you through these issues.
JOHN:
And I can’t echo that enough. I’m not somebody who is litigious or call the lawyer on every little detail, but I can tell youthat having a good partner, whether it’s, and I remember calling you the first time we had an HR issue, for example, andjust having somebody that you call rather than going to the yellow pages and trying to find a litigator, right. HR space orIP, or just having somebody who can kind of quarterback is, is really important. But to your earlier point, if that’s going tobe six or seven or $800 an hour, you might not make those calls when you probably should.
Speaker: 2
I think about it a little more. Yeah.
JOHN:
It’s been great. Dane, thank you so much. And look forward to having you on again, we’ll, we’ll probably have somethingcome up in Charlotte where we want to talk about the legal ramifications, but thank you for joining me for the first time.
BISHOP:
No, thanks for letting me on here. And I’ve enjoyed working with you and it is, it’s a great space work. It’s really fun towatch these companies succeed and grow. And it’s, you know, I have one of my friends, that’s a litigate. It was like, helooked at me once. He was like, so if you have a problem, you call me and everybody’s unhappy. But if you want growyour company called dang,
JOHN:
That is so true. I didn’t realize that. That’s why you always dump it off when it’s the litigator.
Speaker: 2
Awesome.
JOHN:
Well we’ll cheers, Dane. Thanks again.
Speaker: 2
All right. Bye-bye awesome. Cool. I had to bail on my other thing. She was too. Oh, cool. I wonder I was like, Todd’s gotto leave on him. He was just too compelling. I like it.