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Foreign Direct Investment (FDI) and Supply Chain Disruption: Key Takeaways from the 1st Quarter

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Archives, Global Logistics, Global Trade Daily, Site Selection

Foreign Direct Investment (FDI) and Supply Chain Disruption: Key Takeaways from the 1st Quarter

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Foreign manufacturers are increasingly focused on how evolving “Buy American” requirements may impact them. And like most U.S. domestic manufacturers, foreign manufacturers continue facing challenges with supply chain disruption, with the grounding of the Ever Given in the Suez Canal as just the latest headache. In order to mitigate risks associated with more restrictive local sourcing requirements and complex logistical challenges, foreign manufacturers are revisiting the localization of distribution, assembly and production activities in the U.S.

Those are a few takeaways from our conversations over the past three months with dozens of business leaders from the UK, Germany, Austria, Italy, India, China, South Korea, Mexico and other countries around the world. The focus of those conversations has been navigating foreign direct investment (FDI) and supply chain disruption amid the pandemic. Below are some of the main trends we are seeing and examples of how companies are adapting.

Evolving Content Requirements

There is an increasing awareness of the risk manufacturers face tied to changing content requirements in the U.S. These risks are not totally new. However, the Biden administration is signaling that the U.S. will continue increased focus on this issue, which is expected to impact several industry sectors in particular.

On January 25, President Biden signed an executive order aimed at long-standing “Buy American” provisions the U.S. government follows in its own procurement process. The Biden order instructed the Federal Acquisition Regulatory (FAR) Council to come up with new regulations increasing the Buy American requirements and changing the way those requirements are measured. However, the Biden order does not specify how much to increase content requirements – that will be up to the FAR Council to decide by late July 2021. In the meantime, the U.S. government is already tightening its waiver process that is used to allow certain types of procurement projects to receive exceptions to some “Buy American” requirements.

Combined with higher North American content requirements in the United States-Mexico-Canada Agreement (USMCA), more foreign companies are finding themselves grappling with this issue depending on their industry sector. Those involved in government contracting are right in the crosshairs, and the building materials and information technology industries are likely to see the largest impacts. And the importance of this issue will increase if President Biden’s infrastructure legislation passes Congress.

Those content requirements are contributing to a longer-term trend: more industries are moving manufacturing into the United States. Business leaders say they have several strategic reasons for this, including improved logistics and US content requirements, but also proximity to key customers and reduced currency risks. We also continue to hear interest in Mexico as an alternative to the U.S.  While USMCA’s content and wage requirements may shift some Mexican manufacturing to the U.S., Mexico is still very much in play for FDI projects considering North America.

Moving Forward With Site Selection Amid the Pandemic

While the pandemic has made site selection difficult, many companies that are making strategic investments like those mentioned above are finding ways to carry out their location projects. However, although some travel opened up for business travelers in the 1st quarter of 2021, COVID-19 continued to disrupt many plans.

For example, several leaders of a South Korean business recently traveled to North and South Carolina for a site visit. But after their first meeting, they found out an economic developer in that meeting tested positive for COVID-19. As a result, the South Koreans had to quarantine in their hotel and conduct the remaining meetings virtually – with people who were right down the street.

We know of two other instances in the first quarter where a COVID-19 diagnosis, one in the home-country and one in the U.S. after landing, wrecked a site visit. That is part of the reason many of the visits still happening in the U.S. involve companies that already have an American presence, as travel is easier for their personnel.

Still, while international travel is down, international projects are moving forward. The key is the rapid improvement of virtual tools during the pandemic, including virtual showcases that incorporate GIS mapping data, drone footage, and other elements to help with due diligence. While companies are finding these tools extremely useful, they are also finding it more important than ever to have trusted professionals, including legal counsel, on the ground in the locations they are considering. (You can learn more about navigating virtual site selection here.) By combining the advantages of virtual site selection with an expected increase in the ability to travel this summer due to vaccinations in the U.S., foreign companies can move forward with their site selection.

Dealing With Supply Chain Disruption

There may be no clearer image of supply chain disruption than a 1,300-foot container ship walling-off the Suez Canal. But the Ever Given running aground was simply the latest example of the difficulties companies have faced for more than a year now. Manufacturers and the logistics companies serving them say the cost of shipping goods and the ability to get space for those goods have become terribly challenging.

Much of this still goes back to the inability to get products from the source, whether those products are microchips or wood. While there are fewer lockdowns worldwide now than there were last year, many plants continue operating at low capacity or are struggling to catch up to demand.

Marbach Group, a global manufacturer and supplier of die-cutting tools and equipment based in Germany with more than 20 locations worldwide, has been constantly adapting through the pandemic to address these challenges. The February freeze in Texas, for instance, contributed to a shortage of low-grade plywood that Marbach would typically use to make crates for the transportation of its products.

“In turn we had to use our own manufacturing wood for our products to build crates,” Marbach America CEO Fernando Pires says. “Since the lower-grade wood was not available, we increased our cost margins by having to use higher-grade materials for a simple transfer box for our products.”

That’s just to get their products ready for shipping. Pires has many more examples of challenges the company has faced after its products are shipped.

One-way Marbach and other companies have responded is by building up inventory. (Pires jokes his head of purchasing must have had a crystal ball, as Marbach started increasing its stock levels in January 2020.) Marbach reflects an uptick in interest for distribution and warehouse space in the Southeastern U.S., which is evidenced by the significant construction of new warehouse space in the region. Some companies are temporarily leasing warehouses so they can stock up on raw materials and finished goods to avoid shortages when supply chains are not working correctly.

Foreign manufacturers are also diversifying their supply chains and service capabilities. Some companies that traditionally had one or two suppliers of a certain type of component are now adding additional suppliers of the same component for more robust redundancy in the supply chain. Others whose supply chains were concentrated in one part of the world are looking to add geographic diversity – so the next time a country has a COVID-19 problem, they won’t be so dependent on that one area.

Likewise, companies are diversifying their service capabilities and know-how. Many foreign companies rely on key personnel from their headquarters to fly elsewhere and solve problems when needed. That’s become more challenging with COVID-19 travel restrictions, so companies are diversifying their training programs. One executive described it as onshoring skills.

Surging FDI Down the Road?

The final thing that stood out to us amid conversations with foreign business leaders in the first quarter of 2021 is the potential for a surge in FDI coming out of the pandemic. This potential comes from two key factors.

First (and as noted above), many companies remain committed to their strategic growth plans, although the pandemic may temporarily slow the pace of their investments. Second, companies have been in cash-preservation mode and have cheap borrowing options at the moment. In addition to cheap debt for expansion, investors are also hungry for higher returns and are seeking to invest in innovative foreign companies who have growth potential in markets like the U.S.

For companies that have been able to avoid a severe hit to their financial position, all of these conditions are ripe to create a jolt in FDI as the pandemic subsides.

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Sam Moses and Al Guarnieri are leaders in Parker Poe’s Manufacturing & Distribution Industry Team. Sam is based in Columbia, South Carolina, and Al is based in Charlotte, North Carolina. They can be reached at sammoses@parkerpoe.com and alguarnieri@parkerpoe.com

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Solar Silicon Wafer Market is Projected to Reach USD 20 Billion by 2027

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According to a recent study from the market research firm Global Market Insights, the demand for the solar silicon wafer market will observe significant inclination in the coming years with the rise in the number of government regulations to curb greenhouse gas emissions. This has led to the increasing adoption of renewable energy resources, particularly solar energy to achieve electricity generation and energy conversion.

Citing the same instance, the Federal Government of Germany passed the new Climate Protection Law in 2019 in a bid to mitigate emissions of greenhouse gas by 38% through 2030, compared to the discharge levels in 2005. This will result in higher penetration of solar power plants and farms across the European Union.

Besides, there is also a growing presence of solar power stations across developing countries like Malaysia, India, Thailand, and Turkey. The COVID-19 pandemic plummeted the supply chain of polysilicon raw materials used in solar silicon wafer manufacturing processes. It drew a considerable impact on the market players as they are largely reliant on China to procure raw materials and components. However, this has opened new opportunities for regional raw material suppliers to establish local and domestic production facilities to fix the supply chain issues.

Elaborated below are some of the key trends driving solar silicon wafer market expansion:

1) Beneficial features of monocrystalline wafers

Monocrystalline wafers with superior electronic properties are proven to be a good fit for optoelectronic and electronic applications. These wafers provide superior energy conversion efficiency, ranging from 15% to 21%. This is higher than that of polycrystalline wafers. Monocrystalline wafers also offer sleeker aesthetics. An increase in demand for these materials could incite manufacturers to increase their production capacity. In 2021, Tianjin Zhonghuan Semiconductor (TZS) hinted at plans on increasing its 210mm monocrystalline wafer capacity by 150% by the end of the year.

2) Robust demand for inverters

Use in inverters held a 3.5% market share in 2020 and is anticipated to register a CAGR of 8.5% over the forecast timeframe. Growing consumption of solar power in the commercial and residential sectors around the world is likely to propel the requirement of inverters in the solar industry. Large solar silicon wafer, like the 210mm size wafer, provides high environmental and technological benefits as well as a high-power output of over 600 watts.

3) North America emerging as a lucrative business avenue

The solar silicon wafer market of North America is projected to record a 9% CAGR over the forecast period owing to an increasing number of solar power plant establishments in the region. Exponential rise in the number of solar power plant installations could offer promising options for solar silicon wafer manufacturers, who are focused on expansion activities as well as on securing funding and investments. In 2020, Sunova Solar introduced its new series of solar PV module that is based on a big wafer size of 182 mm and has a total module power output of 590W.

Some other key players functioning in the global solar silicon wafer market include JinkoSolar Holding Co., Ltd., Huantai Group, LONGi Green Energy Technology Co., Ltd., Jiangxi LDK Solar High-Tech Co., Ltd. GCL-Poly Energy Holdings Limited, Solargiga Energy Holdings Limited, and CETC Solar Energy Holdings Co., Ltd., among others. These companies are focusing on investing in R&D activities and developing innovative products for maintaining a competitive edge in the market.

Source: https://www.gminsights.com/pressrelease/solar-silicon-wafer-market

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When Cash Is Devalued, Where Should Investors Look For Salvation?

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With a difficult 2020 receding into the past, investors are left to wonder what lies ahead for them, the economy, and their portfolios in 2021.

Unfortunately, they may find that some investing decisions are still tied to the events of last year.

Because of how the COVID-19 pandemic affected the economy, the Federal Reserve saw to it that enormous amounts of money were printed in 2020. That effort to shore up the economy also set off debates about inflation.

Reports show that in excess of 23% of the U.S. dollars now in circulation were created in just the last year, says Toby Mathis, a tax attorney, founding partner of Anderson Law Group (www.andersonadvisors.com) and current manager of Anderson’s Las Vegas office.

“This bodes well for gold and cryptocurrency as hedges, but really means investors need to be in dividend-paying stocks and real estate to avoid the hard blow of the effect of the U.S. monetary policy,” he says.  “Essentially, your cash is being devalued, so you need to buy assets that pay you.”

Mathis’ tips for investors in these tenuous times include:

When investing in real estate, target low-priced rental properties. For inexperienced investors, real estate shouldn’t be the first option, Mathis says. But for those with some investing savvy, it’s a good addition to their overall investing strategy – if they are careful about making the right moves. “You want to save up for your first property, and buy with cash,” he says. “This is the best bet for this investment actually making you money. You should pull that extra cash from stocks, or savings, and purchase a rental property between $70,000 to $120,000. Yes, properties at that price do in fact exist. You’ll find them outside of the big cities with increasing populations.”

Realize that stocks are more liquid than real estate. While Mathis praises real estate as an investment, he acknowledges it has its drawbacks if you suddenly need cash. Stocks can be bought and sold much more quickly. “I can buy a share of a stock and I could sell it tomorrow and get access to that cash within two days,” he says. “If I buy real estate, I could buy it today but I’m probably not going to be able to close tomorrow. Even if I buy with cash, it’s still going to be a week or two. And usually, your closing is going to take 30 to 60 days.” The same is true when selling real estate. “If you have an unexpected life event — your car breaks down, you lose a job, you have a medical emergency — stocks are much more liquid,” Mathis says. “You can turn them into cash much easier than you can real estate.”

Look for stocks that pay dividends. Mathis says investing in stocks is a smart move for both experienced and inexperienced investors, but he also cautions that not all stocks are equal. Some pay dividends, some don’t. He recommends avoiding the latter. “If you’re investing in stocks that don’t pay dividends you’re leaving close to half of the benefits by the wayside,” he says. “And you’re not going to do as well. You have to invest in dividend-producing companies to see true growth.”

“When people ask me whether to invest in real estate or the stock market, my answer is always ‘yes,’ “ Mathis says. “Either one can be great. I still say stocks are best for investors who are just starting out and need to gain some knowledge and experience, but ultimately you would like to have both.”

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Toby Mathis, author of the upcoming book Infinity Investing: How the Rich Get Richer And How You Can Do The Same, is a founding partner of Anderson Law Group (www.andersonadvisors.com) and current manager of Anderson’s Las Vegas office. He has helped Anderson grow its practice from one of business and estate planning to a thriving tax practice and national registered agent service with more than 18,000 clients. In his work as an attorney, Mathis has focused exclusively in areas of small business, taxation, and trusts. Mathis has authored more than 100 articles on small business topics and has written several books on good business practices, including Tax-Wise Business Ownership and 12 Steps to Running a Successful Business.

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8 Common Mistakes Business Sellers Make

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All business owners think about selling their business at one time or another. However, for the ones who decide to go forward and sell, there are certain points that need to be addressed if they want to have a successful transaction and get the most money for their business.

After selling over 800 businesses, I decided to list eight common mistakes owners make when selling their business:

1. Trying to sell it yourself. Business owners usually are not objective about their business. Even if you have the financial skills, you’ll have a tendency to overestimate the value. And you are not expected to have the financial skills to be objective in the valuing of your own business. Instead, you are a successful business owner, which is an art in itself. The selling of a business is the combination of both an art and a science, and it is performed by individuals who do this full-time as their profession. You do what you do best, and let a professional intermediary do what they do best.

There is a reason pro athletes and actors have agents – because they get more money and better terms when they hire someone to negotiate for them. Likewise, you simply won’t get as much value for your business trying to sell it yourself and learn on the job. Attempting to sell your own business will devour your time. You know how to run your business, but this is no time to learn how to be an investment banker or business broker.

2. You are too sensitive about your business. You will take comments made by a buyer personally and perhaps kill the deal. Nobody likes to hear they have an ugly baby, and the same is true when you are selling your business. Any negative comments about your business to you will be taken personally regardless of how hardened you may think you are. The solution is to get an intermediary to soften the blow and translate the buyer’s comments into requests that will not be taken personally.

3. You don’t know how to arrive at fair market value. Owners who are unrealistic about the value of their business are the biggest reason why deals fall through. Get the facts and the reality of what businesses like yours are selling for in the current market, and never believe anything you read in the trade magazines as the gospel regarding valuations.

4. You don’t know how to recognize a qualified buyer. Different businesses require different kinds of buyers, and different buyers will pay different amounts for a business. You need to know which buyers are paying the most in today’s market because buyers change with the market.

5. You probably don’t know where to look for the right buyer. Finding the right buyer for your business who will pay top dollar isn’t as easy as running an ad in a trade magazine or newspaper and seeing who contacts you. As a seller, you want to know who really has the money and whether they are serious. Are they cherry pickers or making low-ball offers? Or do they try to claw back on an offer and use the old bait-and-switch technique? Remember, time is money, and buyers are generally working on your time and your money.

6. You fail to realize that selling a business is a process, not an event. Selling a business involves a structured process that takes time – generally between six to 12 months from conception to closing. It is a very detailed process that not all sellers are up to accomplishing without guidance from a trained professional who has performed this process many times before.

7. You have to assemble the right team to get the job done. Just as in sports, if a seller doesn’t have the right team of players in the game, he will either get defeated or hurt in some way. What is the right team? An attorney who has experience in business transactions and understands the sale of a business to a buyer and not to one’s lifelong golfing buddy. An accountant who understands the tax system and is not afraid to give good tax advice, knowing there is a possibility they will lose your account and is looking out for your best interest. And an experienced intermediary who has working knowledge of your industry.

8. You aren’t committed to selling. Selling a business is a lot of hard work. People don’t realize how much work it is to assemble all of the data that is needed by a buyer to get a business sold. A lot of transactions will fall apart because the seller is either not committed to the process or does not have the mental stamina to continue. The solution is to get help from a seasoned intermediary who will coach from the beginning to the end and help you to reap the rewards for all of your many hard years of work.

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Terry Monroe (www.terrymonroe.com) is founder and president of American Business Brokers & Advisors (ABBA) and author of Hidden Wealth: The Secret to Getting Top Dollar for Your Business with ForbesBooks. Monroe has owned and operated more than 40 different businesses and sold in excess of 800 businesses. As president of ABBA, which he founded in 1999, he serves as an advisor to business buyers and sellers throughout the nation. As an expert source he has been written about and featured in The Wall Street Journal, Entrepreneur magazine, CNN Money, USA Today, CEOWORLD, and Forbes.

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Top 5 Tips for Successful Online Stock Trading

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Many people consider online trading to achieve financial freedom or have a secondary source of income. However, stock trading is a volatile field that you need to be armed with adequate information to succeed. The information you have will guide your decision and preserve you when it gets tough.

With the level of risk involved in online trading, it is good to learn everything you can. The knowledge will go a long way to guide you and help you err on the side of caution as you trade. We have compiled tried and tested strategies that will guide you towards investing successfully in the stock market.

1. Have a Trading Plan

We can define a trading plan as a blueprint that indicates the money management system for a trader alongside the entry and exit point.

Trading does not come naturally. A blueprint is vital for guidance. It is only your passion to make money and the hard work that comes with it that could be natural for some people. Even with the right skills, one needs to build it via learning and some behaviors.

A trading plan serves as the manual for trading. This is one of the things that differentiate a professional investor from another. It is essential to have an open mind and develop the knowledge that contributes to the overall success. The trading plan does not have to be rigid; in time, one can adjust it based on experience as you trade.

The trading plan takes the guesswork out of the game. It sets out the goal and the strategy you want to use to achieve them. It also spells out your acceptable risk level. With your trading plan, making a decision will be comfortable while trading. Every trading plan needs to have a means of entry and how you will get into a market. It should spell out the indicators and the characteristics of the pricing action to attract you towards a trade. In the same way, it will guide you when to exit.

2. Always Learn From the Markets

With the risk involved in trading, you need to arm yourself with the necessary knowledge. This means that you should find a lesson from each process. You cannot fully understand and predict the market and everything that comes with it. As a result, make it a habit to keep learning.

Politics, elections, world reports, pandemics, economic trends, news events, etc., can influence the market. The market system is pretty volatile and dynamic. A good understanding of the past and present market gives traders a good insight into what the future holds.

With research and insights from the Forex blog, you will understand the facts and interpret various economic reports.

3. Always Have a Stop Loss

Unless you are not willing to accept reality, the loss is inevitable in stock trading. The silver lining, however, is that you can control how much you lose. This is where a stop loss comes in.

A stop loss is like a particular risk value that each trader is willing to accommodate with every trade. It can either be a dollar amount or a specific percentage. The idea is to shield you from excessive risk in the trade. A stop loss is good psychologically as it allows you to accept that you will not lose more than what you set.

While we desire to exit all trade with a profit, this is far from the truth. Consider a stop loss as your imaginary personal protective equipment to mitigate risks. Make sure you always use a stop loss, even if you feel you are a professional trader. If you lose a trading section and exit with a stop loss, the loss will be within reasonable limits.

4. Gradually Build Up Positions

As a trader, your superpower is time. To be successful in trading, your aim for buying stock is a reward. The reward can come through any means like dividends, share price appreciation, etc., which could take a long time. With this, here are two buying tricks that can shield you from the uncertainty of the market.

Dollar-cost average:

This involves a regular investment of a fixed amount of money like weekly or monthly. When the stock price is down, this amount will purchase more shares, and fewer when the price rises. The central idea is to even-out the average price you give out.

Buy “the basket”:

It might be challenging to predict which company will benefit you in the long run. In this case, you buy all of them. This gives you a stake in all players, benefitting from any that generates profits. Besides, the gains from the profit can help you cushion out any loss. With this strategy, you get to identify promising companies and focus on them if you want.

5. Know and Understand Yourself

Market beating strategies and your personality are two different entities. As a result, you should take the time to understand yourself. Understanding yourself involves what triggers you to make decisions and your biases.

Indiscipline and lack of patience are two attitudes one needs to deal with to be a successful trader. The first couple of years as a trader will be a steep learning curve. The various market conditions that influence trading will not come at you in a month or a year. It takes a long time. Expect to make mistakes and learn from them during the early days. At times, trading might require the patience and discipline to do nothing.

One also needs to come to terms with the fact that it is essential to have what it takes to succeed with trading. It is necessary to understand whether one is willing to give what it takes to succeed and how it fits the overall goal. There are many resources online with advice on how to trade alongside the characteristics essential to thrive. Many of those resources agree that a positive mental attitude will position you for fantastic opportunities when trading.

Conclusion

These are vital trading rules that can guide you on the side of caution while trading. Be sure to understand them and how they work together. This way, they can help you establish a successful trading strategy. Trading is hard work that requires discipline, patience, and tenacity. Going through these tips will allow you to increase your chances of success in the field.

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In Tough Times For The Unemployed, Franchising Might Be Their Answer

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With millions unemployed and numerous industries struggling due to the coronavirus pandemic, some people who are out of work are considering a new career.

As positions dwindle in the fields they are familiar with, people are finding themselves forced to go outside their area of experience. And for some, that Plan B could be a blessing in disguise.

Owning a franchise has gained popularity in recent years, even in times of economic prosperity, as individuals have looked for a “second act” in their professional life. Franchise sales often do well in a down economy because unemployed people are tired of the lack of control they have in a corporate setting and are ready to become their own boss. Of course, there are also the additional dangled carrots of potentially more income and freedom.

In my world of franchising, pest control, we are seeing some people who have been furloughed in other industries becoming interested in being franchisees. The restaurant, hotel, oil and gas, and airline industries have been hit particularly hard in this COVID-19-caused recession. Some jobs in these and other fields may not be coming back.

But the good news is that many of the people whose jobs have been eliminated or reduced have the skills associated with running a franchise successfully. Those skills span the spectrum from leadership to business experience, discipline, technology knowledge, and communications. For many of these displaced professionals, franchise ownership may be a natural fit.

Becoming a successful franchisee takes hard work and some up-front money. Getting business loans can be tough in today’s economy. Franchise ownership is more attractive to those with a nest egg or a nice severance package that affords them the flexibility to purchase a franchise. It’s also important to note that “freedom” is a relative word when owning a franchise; in addition to long hours while getting the business established, remember that it was somebody else’s business idea, and you have to follow the script of operating the franchise.

But more and more, franchising is something out-of-work individuals with money to risk and a desire to run their own business want to consider. It requires a lot of research and intense due diligence before signing on the franchisee line. Facing life after a layoff and looking for your next move, it’s vital to do your due diligence when investigating a franchise opportunity and to clearly understand what your role will be as a franchisee.

Some of the top benefits of owning a franchise:

Experience is optional. How many times have you seen a job posting that interested you, but the experience required didn’t match up with your work history? You don’t have to worry about that as a franchisee. The franchisor provides the training to help you gain the skills to operate the franchise. A major part of what makes a franchise successful is an easily replicable system.

Minimal startup work. One of the most difficult parts of owning a business comes in the startup stage, which involves, among other tasks, writing a business plan and doing market research. But buying a franchise allows you to skip this often painful stage and hit the ground running. The template is in place, the market research for the region has been done, and the business model is well established.

Risk reduction. When someone decides to buy a franchise, rather than start a business from scratch, they have reduced their risk of failure. For one thing, consumers are already aware of the brand name, and that awareness puts the franchisee ahead of the game. The product and the system have been tested and shown to work, and the franchisee’s access to corporate guidance is a big asset in growing their franchise.

Additional support. Along with training and ongoing advice received from the franchisor, franchisees can get support from other franchisees in the company’s network. Additionally, the company itself does marketing and advertising on a wide scale that by association helps promote the franchisees’ locations.

Help in negotiating operating costs. Typically, someone starting a new business as an independent owner is out there alone trying to negotiate prices for items to get their business off the ground. But as a franchisee, often the franchisor already has relationships with vendors, giving franchisees the ability to purchase goods at discounted prices.

If you’re a displaced worker or executive, the franchise industry may be the opportunity you’ve been looking for. It could make life after the layoff better than you imagined.

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Chris Buitron is CEO and president of Mosquito Authority® (www.mosquito-authority.com), a nationwide leader in mosquito control with franchises serving communities across the U.S. and Canada. Buitron has an extensive background in franchise industries. He was chief marketing officer for Senior Helpers, vice president of marketing for Direct Energy (home services division), and director of marketing for Sunoco Inc., where he supported the company’s 4,700 franchised and company-owned rental facilities across 23 states (over $15B in annual revenues).

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Tales from the Trenches: Founder Equity and Founder Agreements in the Pandemic

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From day one, it’s crucial to put your company on the right path. With proper planning, you can avoid a number of common problems that would make investors run for the doors, such as co-founder disputes, tax issues, and cap tables. Startup equity is one of those things that most founders struggle with unless they have an MBA.  But as with all of life, founders’ paths may grow apart for different reasons. It’s one thing when the “divorce” is peaceful, but sometimes situations become very complicated. In a blink of an eye, you’re fighting over the “custody” rights with someone who was previously on your side.

With the added stresses of the pandemic—working from home or working from anywhere—and the pivots required for businesses to adapt their models and work styles to the new normal, we are seeing significant pressure placed on the relationships between founders and other founders, between boards and founders, and between investors and founders.

Founder equity splits. When considering how to initially split founder equity among the various co-founders, some of whom may be present, and some of whom are merely a twinkle in your eye, startups should think long term.

First, consider the relative contributions each person will make.  While everyone says they are “all in” at the start, are they quitting their jobs? Have they invented something? Is their role critical to fundraising or engineering? Who is adding the most value now, and who will add value later? What cash is available? Get clear on these issues from the start and understand that they will evolve over time.

Types of startup equity. As to the types of startup equity, they are generally structured as common stock at formation. The price per share is usually insignificant, or what is referred to as “par value,” a “peppercorn,” or close to zero. This is referred to as “sweat equity,” which is vested over time.

Founder stock terms can also include some of the elements typically found in preferred stock, such as governance rights, liquidation preferences, and super-voting rights. Special founder terms can be a red flag for venture capital investors, and for that reason, particular consideration should be given as to whether such terms are reasonably obtainable.

At formation, cash investors typically receive a convertible note, a simple agreement for future equity, or series seed preferred stock. Some founders put in cash at the formation and structure the cash investment in one of these instruments.

Who gets what? There are four groups of people who typically get equity in the early stages:  founders and co-founders, advisors, investors, and employees, and consultants. Who gets what is more art than science, and there is no simple answer. Numerous websites offer purported “co-founder equity split” calculators and practical advice.

Equity incentive plans. Stock options are the typical currency for employees, consultants, and advisors of startup companies. Restricted stock units, restricted stock awards, phantom stock, and a large assortment of hybrid instruments may also exist.  In early-stage and venture-backed startups, the currency is usually a stock option. Stock options can be structured in a number of ways for tax purposes. Typically, they can be “incentive stock options” or “ISOs.” If options do not qualify for ISO status, they are referred to as “non-qualified” stock options, or “NSOs.” An ISO gives an employee the right to buy shares with the profit taxed at the capital gains rate, not the higher rate for ordinary income.

Vesting. Founder equity, like stock options, typically vests over time. Founder equity is usually subject to repurchase by the company, with one-fourth of the equity ceasing to be subject to repurchase, or vested, after a one-year cliff. After that, founder equity vests monthly or quarterly until the culmination of four years from the formation. Sometimes, repeat entrepreneurs can obtain equity without offering the right of repurchase or reverse vesting, or with reduced vesting, but four years is the standard.

Stock options are not actual ownership, and there is no cash outlay upon grant. These options become exercisable after one year from the initial vesting date, which is usually the date of grant, and they vest in monthly or quarterly installments until four years have transpired from the initial vesting date. In order to exercise stock options, the holder pays the exercise price, which for tax purposes must correspond to fair market value upon the date of the grant. Unless the option has ISO status, upon subsequent exercise and sale, it would be taxed at ordinary income tax rates.

Cap tables. Founders are well served to ensure that their companies use a technology-enabled vendor to store the company’s capitalization records in an automated, secure, and cloud-available format.

409A valuations. In a nutshell, Section 409A of the Internal Revenue Code provides a safe harbor. It suggests that the IRS will not challenge an exercise price as being below fair market value if a third-party independent valuation firm established the fair market value, and that value was approved by the board of directors, all within the prior year of the grant. While there is much fine print and some exceptions, a 409A valuation is generally important to obtain once a year and after each financing round. This risk of doing nothing is that the IRS could argue that the option was granted below fair market value and impose a higher tax rate on the income or gain.

When things change. After your company’s formation is complete, the founder equity has been divided, the equity incentive plan approved, and stock options doled out, life goes on. The world turns, and things change. Co-founders join, co-founders leave, co-founders fight, key employees join and depart, venture capital is raised, and M&A transactions come and go.

Founder roles adjust over time. It’s only natural. So, as well, should their salaries, bonuses, commissions, downside protections, and equity stakes. These are all easy to adjust when things are going well, but what about when things go sideways? Management carve-out plans can provide incentives for people to struggle through a tough spot.

Founder break-ups and departures. When founders leave, the first questions asked are whether the equity is vested and what happens to it. If unvested, the company should repurchase it at the issue price. For vested equity, founders will want it bought back at fair market value, and investors won’t want precious dollars going out the door to provide liquidity to someone who is leaving. Deals are struck where founders have something that investors want, like super-voting rights, board control, and exit rights. When the parties can’t agree, founders who push the envelope too far risk getting recapitalized and diluted, being terminated for cause, undergoing investigation, and having their information rights clipped. Does the founder have the right to severance? Is it enough to buy peace?  Non-competition agreements post-termination of employment are generally not enforceable in California, so this can be another carrot that departing founders can dangle in exchange for a buyout of their shares. Will the remaining team know where the bodies are buried, or is a consulting agreement with the departing founder required to make sure her or his services are available when needed? Was there a bonus due? A commission? Inevitably, companies and departing founders will need to get along to ensure a good exit.

Mergers and acquisitions. It is not uncommon for companies to be put up for sale when a founder departs, and market participants expect it.  So for boards and founders in a deadlock, is it the right time to bring things to a boil? Who constitutes the universe of potential strategic and financial buyers? Is it feasible to raise a growth equity round or “minority recap” with primary and secondary capital to reshuffle the C-suite and the cap table? Is a management carve-out plan needed? A new retention plan? Or restructuring? Potential scenarios abound…

What happens next. Invariably, after a founder divorce, the parties need to find a way to get along…in the board room…to raise capital…to help sell the business…to market the message…to evangelize the mission.

Things sometimes fall apart. Founders have to know how to keep things together until the next off-ramp is in sight.

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Louis Lehot is the founder of L2 Counsel. Louis is a corporate, securities, and M & A lawyer, and he helps his clients, whether they be public or private companies, financial sponsors, venture capitalists, investors or investment banks, in forming, financing, governing, buying and selling companies. He is formerly the co-managing partner of DLA Piper’s Silicon Valley office and co-chair of its leading venture capital and emerging growth company team. 

L2 Counsel, P.C. is an elite boutique law firm based in Silicon Valley designed to serve entrepreneurs, innovative companies and investors with sound legal strategies and solutions. 

real estate
Archives, Commentary, Global Trade Daily

7 Insights to Prepare Investors for the Impact of the Presidential Election on Real Estate

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The 2020 presidential election campaign is a highly contentious affair. Doubtless, the results of the election will have a far-reaching impact on a number of sectors of the American economy. But what are the true implications for the housing market?

How will each candidate’s policies affect real estate? Whether you’re investing in real estate or just looking to buy or sell a house, here are some tips and insights to help you prepare and prosper, regardless of who wins.

1. Keep calm and carry on

Regardless of who wins on election day, real estate prices probably won’t see any drastic long-term changes. Historically speaking, the housing market performs consistently (and consistently well) under both Democrats and Republicans. Since 1979, the annual rate of property returns averaged between approximately 7 and 10 percent for both Democratic and Republican presidential administrations.

Real estate under Republicans and Democrats

2. Prosperity often follows uncertainty

In election years, home sales usually drop off from October to November more steeply than in non-election years (-15% vs -10%). This reflects buyer caution facing the uncertain outcome of a presidential election. However, the year following a presidential election is typically the strongest housing market year in every four-year election cycle, suggesting that the dropoff in November simply delays demand until the following year.

House Price Trends During Election Years

3. Ignore red herrings, watch for black swans

Our system ensures that presidents alone don’t make laws or control fiscal and monetary policy. This means the president’s impact on housing may be overrated. On the other hand, natural disasters, geopolitical events, and ongoing developments with COVID-19 are more likely to have an impact on property values and rent trends than election results. Exogenous shocks to the system can increase unemployment and force interest rate changes, which in turn disrupt financial and housing markets.

4. Pay attention to investor incentives

Election results in the 2020 cycle probably matter a bit more to real estate investors than to retail home buyers. This is because the candidates have divergent policy prescriptions on several investor-oriented policy tools, including 1031 Exchanges and opportunity zones.

5. To the victor go the construction spoils

Red states have reported higher consumer confidence levels than blue states since the 2016 election. Likewise, single-family building permit growth was stronger over the same period in Trump-voting counties than in Clinton-voting ones, despite similar job and wage growth. It logically follows that a Biden win could benefit home building in blue counties, while a Trump re-election could continue propelling strong performance in red counties.

6. Follow the money

Over time, as presidential administrations roll out their spending priorities, different economic sectors respond in varying ways. The true consequences of the election on real estate markets will likely take a couple of years to materialize. Opportunities for investors and consumers to seize will present themselves based on what industries a president focuses on, and how well their administration works with Congress.

7. Weather the storm (and hope it passes quickly)

The biggest short-term risk to the housing market and the larger economy overall is a disputed election and protracted legal battle. Such a scenario would likely be accompanied by widespread civil unrest, which would spook stock markets, rattle consumer confidence, and in extreme scenarios cause massive property damage across the country. During the disputed 2000 election, the Dow Jones average fell 4% in the month between election day and the moment Al Gore conceded. It rebounded rapidly thereafter.

 

This article originally appeared here. Republished with permission. 

small business
Archives, Global Trade Daily, Special Reports

5 Solutions to Small Business Money Troubles

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Virtually every small business, no matter its focus or industry, can fall prey to financial issues from time to time. Widespread crises like pandemics can instantly amplify these effects and have left many SMEs in the lurch in 2020.

Over and above the effects of challenging times, entrepreneurship is fraught with difficulties itself. Both experienced and novice business owners face significant challenges, and their nature can vary widely. Arranging funding for start-ups, maintaining cash flow, and dealing with strapped budgets are all part of an entrepreneur’s day to day operational obstacles.

If your small business is facing concerning fiscal challenges, you’ll need to approach them delicately and deliberately with the right mindset. Experts recommend tackling such challenges as they arise, rather than leaving them to snowball into much larger problems later down the line.

Here are solutions to 5 of the most common money troubles facing small businesses today.

Issues with Capital

Banks are becoming increasingly strict and discerning in terms of which small businesses they are willing to risk financing. This has unfortunately left many business owners in a tricky position, forcing them to drastically reduce their capital budgets.

Thankfully, there are many ways to secure financing for small businesses that don’t involve conventional bank loans. You could turn to friends or family members for assistance or perhaps go into business with a like-minded partner who can offer the capital you need to stay operational.

Many entrepreneurs view self-fueled growth models as the least risky and most effective way to operate small businesses. Instead of trying to secure funding to establish your company overnight, focus on your primary customers and offer value-added services to them. Your business will probably grow automatically thanks to word of mouth. However, if you do still require outside funding, it’s recommended that you speak to an attorney to avoid any potential future complications.

Restricted Cash Flow

Most small businesses cannot stay afloat without a certain amount of cash flow. You can perform tasks timeously, send out invoices, and only receive money after a month—if at all. In the interim, you will be left to address all of your business-related costs like salary payments, infrastructural costs, and personal expenses.

The solution in this case is to meticulously plan and budget your operations to maintain cash flow however you can. An effective way of boosting cash flow is requesting down-payments when you receive orders from clients. This money will allow you to address your expenses and keep money aside for unforeseen costs.

You could also request faster invoice settlement terms, as this will buy you extra time if clients are not prompt payers. Additionally, you could approach your vendors and request that they invoice you after 45, 60, or even 90 days. This is a somewhat unconventional approach, but if you’re in good standing with your vendors, it could help you to loosen your cash flow and keep your small business in the clear.

Tight Marketing Budgets

Even if your business has sufficient cash flow, you may have a tight budget for promoting your products and services.

To remedy this, remember that every entrepreneur deals with budget issues from time to time. You can reduce the frequency of this phenomenon by optimizing your marketing efforts. Spend your advertising cash where it will maximize your ROI and use the remainder for other infrastructural costs and marketing experiments. Don’t take risks with your marketing, rather play it safe and simple as you won’t always recoup your costs.

Worryingly Low-Profit Margins

If you’ve noticed a sudden dip in your once-strong profit margins, you’re not alone. Many small businesses are facing similar issues in 2020—especially those who don’t operate exclusively online.

To begin addressing this problem, you should create a weekly or monthly forecast of your cash flow based on your current financial results. Your forecast should include detailed cash flow estimates, such as invoices paid by clients, and financial outflows like vendor payments, salaries, and rental costs.

In this specific scenario, it’s helpful to bear a worst-case scenario in mind. Develop a pessimistic forecast and assess it against your cash flow. If you’re still generating an income, you should be in the clear. If not, however, you will need to find ways to boost cash inflow and reduce outflow until your profit margins have stabilized.

Debt and Loan Defaults

Defaulting on loans can be devastating for your business and your own financial standing. If you borrowed money before the pandemic struck, you might be struggling to repay it now. The last thing you probably want to do is discuss those debt-related issues with others—but that’s precisely what you need to do.

If you fear that you may default on a loan, immediately contact your lender. Approach them with the facts and figures relevant to your situation, and if possible, calculate how much of your loan you can repay, and where you need leeway. They will often be willing to negotiate reduced rates and lower interest-only payments to assist you temporarily.

Alternatively, if you don’t contact your lenders in good time, you may face the bank demanding immediate repayment in full. If you cannot pay, they can repossess your collateral and sell it off to repay the loan. Rest assured that most lenders will appreciate your honesty about your financial situation. It allows both parties to explore more options for solutions and to find a flexible fix that works for all involved.

The Bottom Line

If your small business is facing financial issues, you’re not alone. A huge percentage of SMEs tackle fiscal fiascos from time to time, and not all of them survive.

Your best approach if you are facing monetary concerns is to be proactive and to tackle problems head-on. Don’t wait until they have spiraled out of control or until a bank representative shows up at your door. There are many ways to ensure that your business operates smoothly and continues to generate a profit, even during difficult times.

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Nina Sharpe is a content champion for various outlets, covering various business topics from finance for startups to small business accounting tips.

science
Archives, Global Logistics, Global Trade Daily

The DNA of A Science Startup: Betting on the Right Horse

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There is no doubt we are living through atypical times. A confluence of factors have introduced, in an unprecedented way, the one thing that businesses and investors abhor: uncertainty. Now more than ever, the investor community needs to evaluate, which startups and newly launched businesses are likely to weather the storm, particularly businesses commercializing a science-based idea.

We’ve identified three kinds of science-based startups that are likely to weather the storm, and three that may succumb, beginning with three that will succeed:

1. Startups that add value (beware of “complete reinvention”): Many startups, given their energy and momentum, may seek to “completely reinvent” the ecosystem. These startups underestimate the inertia of not only consumers but also established players, supply chains and practices within the industry. One good example is the diagnostics sector; a startup that aims to improve efficiency for large players (E.g. such as Quest Diagnostics) by offering, say, a new kit that greatly reduces testing expenses, is more likely to thrive, even if it does not have unicorn potential. Conversely, a startup that offers new technology that will require a large player to completely replace or revamp an existing pipeline will not be easily adopted.

2. Startups in evergreen sectors within biotech/pharma: Science-based startups are almost immediately equated with biotech. This is understandable, as the biotech sector attracts the most attention and most capital. While all of medicine is always up for improvement, within biotech/pharma, certain disease areas such as Oncology and Neurobiology remain evergreen. This is not to say that a strategy similar to Gilead’s in developing some antivirals (best-in-class) will not succeed, it is just that such strategies need to be executed very carefully. In contrast, the drastic unmet need in some sectors means a less than perfect drug stands a good chance of gaining market share. In fact, over the next 10-15 years, Neurobiology appears poised to experience leaps similar to Oncology when biologics took the stage by storm. As the population ages, neurodegenerative diseases are likely to increase, creating potential for a large market. The same demographic trend also hints at one as yet untapped area, that of aging biology. Although there are big players, for instance, Calico, the path forward remains unclear given the complicated science.

3.  Startups that address fundamental needs: Startups that address fundamental needs and deficiencies in any sector are most likely to survive and thrive. This is not by any means a new thought or message, but one that needs to be highlighted and should remain a guiding principle. While they may not be apparent, deficiencies exist in all sectors, be they automation, manufacturing, or even something as distinct as textiles and apparel. One straightforward example here is biotech/pharma: economic downturn or not, new medicines are always needed. Another example is food-tech, nobody is going to stop eating; in fact, disruption of supply chains is expected to create new opportunities. It is not surprising that a number of startups are developing plant-based substitutes for animal products, and demand for these is expected to remain strong. From a high-level perspective, startups emerging from materials science, nanotechnology, and of course computer science, especially AI, are particularly attractive, as they appear poised to provide solutions to long-standing environmental problems. On the other hand, areas such as biofuels, which attracted considerable attention a decade ago, no longer appear viable given the shift toward electric and hybrid vehicles.

Conversely, there are three types of ventures that may not weather the storm:

1. Startups that pivot without having a core strategy: A pivot by itself is not bad, and many businesses do indeed change directions to take advantage of an opportunity or rebuild their revenue streams. But there is an important distinction: businesses that lack a core strategy will rarely survive even with a pivot, especially in a fickle investment environment. Many companies and even well-funded startups may venture into new areas such as infectious diseases, but this does not change their original business model. A COVID-specific solution will melt away the minute a good drug/vaccine is announced. The diagnostics sector here provides good case studies. A newly developed scientific method or protocol may be able to detect the SARS-Cov2 virus within minutes or seconds, which is a great achievement, but will this solution supplant existing medical pipelines and setups? If a startup’s pivot is purely opportunistic, rather than being part of a larger strategy, it may indicate inability to survive over the long term.

2. Startups that address trends: This overlaps with the previous point, but it is important in its own right. Ideas are dime-a-dozen, and many startups are born during times of distress and social upheaval when deficiencies in our societies and industry come to fore. It is important to distinguish if the startup is addressing a need-of-the-hour or a trend that has the potential to stick.  With regard to science-based startups, there is less of a trend following, although it is quite common for startups to mushroom every time new technology is developed. One example of this is AI, which represents a trend that is cyclically in vogue. Established computer scientists can attest to multiple periods when AI was supposed to solve all of the world’s problems, only for scientists and entrepreneurs to realize that the real world was too complex and you could never really leave decision making to machines for many crucial tasks.

3. Startups that fall prey to shifting regulation and circumstance. This is unfortunately beyond a startup team’s control, but investors should be careful when funding startups in such sectors. Two interesting examples here are businesses that provided services to the oil and natural gas industry, and the development of biotechs around CRISPR-Cas9 genome editing technology. In case of oil, it would have been very difficult to predict that petrochemicals and related sectors would plunge overnight, wiping billions of dollars’ worth of value from some of the biggest companies in the world. A strange confluence of geopolitical contests, coupled with uncertainty due to a pandemic and shifting consumer habits, probably a once-in-a-lifetime event, may spell doom for many players. Any startups connected to this sector may likely suffer significantly in the coming months, and their long-term survival is uncertain. In the case of CRISPR, the potential for rogue actors to misuse the technology means that many governments in the world will proceed extremely cautiously, and indeed, initial miss-steps may lead to stringent regulation. While there is plenty of potential, CRISPR-based startups should be evaluated carefully.

This brings us to the big question: where are the real returns? Can we break out of COVID play? Real returns are where startups and ideas address fundamental questions and needs that are apparent but overlooked. Overall, even though investor interest these turbulent times still appears to be strong, with many new startups being funded, the next few quarters will be the ones to watch, as the downturn reduces both investor appetite and revenue. Investors must continue to be discerning with their dollars, especially when it comes to science-based startups.

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Dr. Shailesh Date is the founder and CEO of LRC Systems, which uniquely combines advances in natural and quantitative sciences with cutting-edge technology to help solve fundamental health, economic and social problems for public and private organizations. LRC serves as an ideas hub for high-level transdisciplinary research that is bigger, faster and more impactful, to propel innovations that can change the world.  Dr. Date obtained his Ph.D. in Molecular Biology (computational focus) and completed his postdoctoral research at the University of Pennsylvania’s School of Medicine, focusing on apicomplexan parasites, including Plasmodium falciparum, the causal agent of malaria. His current research covers topics in both public health and complexity science). He also serves as Associate Adjunct Professor in the Dept. of Epidemiology & Biostatistics at UCSF and Adjunct Professor of Biology at SF State.