20211219214157D4402 PPT3-sesi3,4

Course : FINC6001
Effective Period : Februari 2022
Organizing and Financing a New Venture
Session 3,4
Acknowledgement
These slides have been adapted from:
Leach, Melicher, Entrepreneurial Finance, 7ed, Cengage, ISBN

9789814986229
chapter 3
Chapter 3
• Organizing and Financing a New

Venture
Leach & Melicher, Entrepreneurial Finance, 7th Edition. © 2021 Cengage. All Rights Reserved. May not be
scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Chapter 3: Learning Objectives
• Discuss how we will be progressing through the venture life cycle in this text
• Describe the proprietorship, partnership, corporate and limited liability company
forms of business organization
• Describe the benefits, risks, and basic tax aspects of various organizational forms
• Discuss the use of patents, trade secrets, trademarks and copyrights to protect
intellectual property
• Describe seed, startup, and first-round financing sources
Forms of Business Organization
Sole Proprietorships
Partnerships
• General
• Limited
Corporations
• C corporations
• S (or Subchapter S) corporations
Limited Liability Companies (LLCs)
Proprietorships
Proprietorship:
business venture owned by an individual who is personally liable for the
venture’s liabilities
Unlimited liability:
personal obligation to pay a venture’s liabilities not covered by the venture’s
assets
Partnerships (1 of 2)
Partnership:
business venture owned by two or more individuals who are jointly and
personally liable for the venture’s liabilities
Joint Liability:
legal action treats all partners equally as a group
Partnerships (2 of 2)
Joint and Several Liability:
allows subsets of partners to be the object of legal action related to the partnership
Limited Partnership:
limits limited partner liabilities in a partnership to the amount of their equity capital contribution to
the partnership
Corporations
Corporation:
a legal entity that separates personal assets of the owners (shareholders) from the assets of
the business
Limited Liability:
creditors can seize the corporation’s assets but have no recourse against the shareholders’ personal
assets
Corporate Charter:
legal document that establishes the corporation

S Corporation:
provides limited liability for shareholders; plus, corporate income is taxed like personal income to the
shareholders
Limited Liability Companies (L LCs)
Limited Liability Company (LLC):
a business organization owned by “members” (shareholders) with limited liability

Major Incentive for Organizing as an L LC
• earnings can be taxed at the personal income tax rates of the members
Comparing Business Organizational
Forms
Number of Owners and Ease of Startup
Investor Liability
Equity Capital Sources
Firm Life and Liquidity of Ownership
Taxation
Number of Owners & Ease of Startup
(1 of 2)
Proprietorship
• one; low time and legal costs
Partnership (general)
• two or more; moderate time and legal costs
Limited Partnership
• one or more general and one or more limited partners; moderate time and legal costs
Number of Owners & Ease of Startup
(2 of 2)
Corporation (C)
• one or more, with no limit; high time and legal costs
S (Subchapter S) Corporation
• less than 100 owners (since 2005); high time and legal costs
Limited Liability Company (LLC)

• one or more, with no limit; high time and legal costs
Investor Liability (1 of 2)
Proprietorship
• unlimited
• unlimited (joint and several liability)
Limited Partnership
• limited partners’ liability limited to their investments
Investor Liability (2 of 2)
Corporation (C)
• limited to shareholders’ investments
• limited to shareholders’ investments
Limited Liability Company (LLC)

• limited to owners’ investments
Equity Capital Sources (1 of 2)
Proprietorship
• owner
• partners, families, and friends
Limited Partnership
• general and limited partners
Equity Capital Sources (2 of 2)
Corporation (C)
• venture investors and common shareholders
• venture investors and Subchapter S investors
Limited Liability Company (L LC)

• venture investors and equity offerings to owners
Firm Life & Liquidity of Ownership (1 of
2)
Proprietorship
• life determined by owner; often difficult to transfer ownership
• life determined by partners; often difficult to transfer ownership
Limited Partnership
• life determined by general partner; often difficult to transfer ownership
Firm Life & Liquidity of Ownership (2 of
2)
Corporation (C)
• unlimited life; usually easy to transfer ownership
• unlimited life; often difficult to transfer ownership

• life set by owners; often difficult to transfer ownership
Taxation (1 of 2)
Proprietorship
• personal tax rate
• personal tax rates
Limited Partnership
• personal tax rates
Taxation (2 of 2)
Corporation (C)
• corporate taxation; dividends subject to personal tax rates
• income flows to shareholders; taxed at personal tax rates

• income flows to owners; taxed at personal tax rates
What is Intellectual Property?
Intellectual Property (IP):

a venture’s intangible assets and human capital, including inventions that can
be protected from being freely used or copied by others
Protecting Valuable Intangible Assets
There are Four Forms of Protection:
• Patents
• Trade Secrets
• Trademarks
• Copyrights
IP Protection Methods: Basic Definitions
(1 of 2)
Patents:
intellectual property rights granted for inventions that are useful, novel, and non-
obvious
Trade Secrets:
intellectual property rights in the form of inventions and information, not generally
known to others, that convey economic advantages to the holders
IP Protection Methods: Basic Definitions
(2 of 2)
Trademarks:
intellectual property rights that allow firms to differentiate their products &
services through the use of unique marks
Copyrights:
intellectual property rights to writings in printed and electronically stored forms
Patent Basics
Intellectual property rights granted for inventions that are “useful,” “novel,”
and “non-obvious.”
Patents are granted by the U.S. Patent and Trademark Office
Patent law is very complex (you most likely need to hire a patent applications
specialist lawyer)
Four Kinds of Patents
Utility Patents:
cover mechanical or general inventions, chemical inventions, and electrical
inventions
Design Patents:
cover the “appearance” of items (e.g., sports uniforms, electronic products, and
autos)
Plant Patents:
protect discoveries of asexual reproduction methods of new plant varieties
Business Method Patents:
protect specific ways of doing business and the underlying computer codes and
technology
Utility Patents: Basic Information
A new idea by itself cannot be patented
The idea must be part of an invention that has a “physical form” such as a
product
The physical form also can exist as a sequence of steps contained in a
process or the delivery of a service
Utility Patents: Application Process
Develop or conceive an invention

Prepare (you, or a registered patent attorney on your behalf) a patent
application
File the application in U.S. Patent and Trademark Office
If successful, the utility patent life will be 20 years (prior to mid-1995 the life
was 17 years)
Utility Patents: Provisional Patent
Application
Beginning in mid-19 95, inventors were permitted to file a provisional application

Filing dates can be established more quickly & at lower costs, and small entities
are charged lower filing fees
Allows the inventor to use the term “patent pending” on the invention
However, patent rights and protection occur only when a patent is issued
Prov. Patent Application Requirements
An invention title, the inventor’s name, residence, and address for

correspondence
Clearly written description and “drawings”
A person skilled in the art of the invention’s area should be able to use or
practice the invention
Has a life of 12 months and will be abandoned unless a regular patent
application is filed
Regular Patent Application Requirements
A detailed written description of the invention and detailed drawings of how

the invention works
One or more claims justifying why the invention should be patented
Inventor must indicate the “best use” or method of practicing or carrying out
the invention
Why Might Your Application be Rejected?
(1 of 2)
For a patent application to be accepted, the invention must be:

• Useful
the invention cannot just “do nothing”

• Novel
the invention was not previously produced, described in a publication, or patented

• Non-Obvious
invention should be “non-obvious” to a person with ordinary skills in the art of the
invention’s area or subject
Why Might Your Application be Rejected?
(2 of 2)
Timing of filing the application

• must be filed within one year of first introduction to the public
• in the future, it may be necessary to file prior to any public disclosure or use
What Does a Patent do for the Inventor?
The government does not enforce your rights
The burden of enforcing the patent lies with the inventor and enforcement can
be costly
Records indicate that over one-half of patent infringement suits taken to court
are not upheld on behalf of the inventor
Trade Secrets (1 of 3)
Trade secrets:
• intellectual property rights in the form of inventions & information (e.g., formulas,
processes, customer lists, etc.)
Trade secrets are not generally known to others & convey economic advantages to the
holders
Why Consider Protection as a Trade Secret instead of as a Patent?
• trade secret law can sometimes protect inventions that did not qualify for
patents
• some inventors want to avoid the detailed disclosure required by the U.S.
Patent and Trademark Office
• there are no time restrictions on trade secrets (in contrast to patents)
What are Drawbacks of Seeking Protection under Trade Secrets Law?

• there is no formal procedure for obtaining protection as a trade secret
• protection is established by the secret’s characteristics and efforts to protect it
• holders do not have exclusive “rights” to what comprises the secret (someone
could independently replicate the secret)
Trademarks (1 of 4)
What are Trademarks?

• Intellectual property rights that allow firms or others to differentiate their products and
services through the use of unique “marks”
Marks allow consumers to easily identify the source and quality of products/services
Trademarks (2 of 4)
Most trademarks take the form of names, words, or graphic designs
Trademarks also can be on the shape of packages, colors, odors, and
sounds
Trademarks are the most valuable form of intellectual property for many firms
A trademark should be suggestive of (but not describe) a product or product
line
Trademarks (3 of 4)
How do You Obtain or Disclose a Trademark (or ™)?
• no formal government procedure exists for establishing a trademark
• ownership is established by being first to use the mark on products
• a trademark can be lost if the mark becomes a generic term or label (e.g.,
“aspirin” or “cellophane”)
Trademarks (4 of 4)
How do You Register a Trademark?
• a trademark can be registered in individual states or with the U.S. Patent
and Trademark Office
• a federal registration should be used if a product is sold in more than one
state
• products with federally registered trademarks show the trademark
accompanied by ®
Copyrights
Intellectual property rights to “writings” in written and electronically-stored
forms
Protects the “form of expression of an idea” and not just words themselves
Traditional way to establish a copyright is to “publish” your book or other work
accompanied by a copyright notice using the word “Copyright” or the symbol
©
Other Methods for Protecting IP
Confidential Disclosure Agreements:

• documents used to protect an idea or other forms of intellectual property when disclosure
must be made to another individual or organization
Employment Contracts:
• agreements between an employer and employee whereby the employer employs
the employee in exchange for the employee agreeing to keep confidential
information secret and to assign ideas and inventions to the employer
Seed & Startup Financing
Financial Bootstrapping
• minimizing need for financial capital and finding unique ways of financing a new venture
Business Angels
• wealthy individuals who invest money in fledgling ventures in exchange for the excitement
of launching a business and a share in any financial rewards

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Course : FINC6001

Effective Period : Februari 2022

Organizing and Financing a New Venture

These slides have been adapted from:

Leach, Melicher, Entrepreneurial Finance, 7ed, Cengage, ISBN

• Organizing and Financing a New

Limited Liability Companies (LLCs)

Joint and Several Liability:

legal document that establishes the corporation

Limited Liability Company (LLC):

a business organization owned by “members” (shareholders) with limited liability

Limited Liability Company (LLC)

Limited Liability Company (LLC)

Limited Liability Company (L LC)

Limited Liability Company (L LC)

Limited Liability Company (L LC)

Intellectual Property (IP):

Develop or conceive an invention

Beginning in mid-19 95, inventors were permitted to file a provisional application

An invention title, the inventor’s name, residence, and address for

A detailed written description of the invention and detailed drawings of how

For a patent application to be accepted, the invention must be:

the invention cannot just “do nothing”

the invention was not previously produced, described in a publication, or patented

Timing of filing the application

What are Drawbacks of Seeking Protection under Trade Secrets Law?

What are Trademarks?

Confidential Disclosure Agreements:

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