The Risks of Two-Timing a 9-5 Employer

The costly consequences of raising money for a sideline startup business while employed

Q.  I am currently kicking around an idea for a startup company. I don't have any money and can't leave my full time job. Is it possible to raise $30,000 to fund the development of a product prototype while still employed at another company?

A.  It is often said that entrepreneurship is one of the last great frontiers. It does seem that way because the process of planning a business really is a wide open landscape with freedom for entrepreneurs to move in any desired direction with no fixed rules.

Whenever someone asks me if it is possible to raise a certain amount of money for an "as is" business I say "Sure. It is possible." But, as I also place a high value on an entrepreneur's time, I like to encourage entrepreneurs to do everything possible to improve their chances of raising money in a practical, time-saving way.

If you intend to complete the prototype while still working, potential investors will question your ability to manage two jobs at once. They also will recognize that there is a cost to investors in terms of the company taking longer to reach important product development milestones. For this reason, you shouldn't expect a premium valuation on this first round of money.

A bigger concern to investors, particularly if your employer is working on similar technologies, is potential intellectual property challenge. So, it's important for you to conduct all startup planning away from your job. No emails, no phone calls, no use of your employer's equipment. You don't want your current employer to make any ownership claims to your side line innovations.

It can happen! Right now Mattel Inc. is battling rival MGA Entertainment, the manufacturer of the hot-selling Bratz doll line, in the courts. Mattel claims that a former Mattel employee took Bratz-like sketches that had been developed at Mattel over to his new job at MGA. Now Mattel wants compensation, possibly ownership of the lucrative Bratz doll franchise.

There is another reason to clearly separate your job from your new enterprise. It's a matter of integrity. Investors are attracted to entrepreneurs who consistently "do the right thing." You also don't want to risk getting fired from your current job – a blemish that will stay with you for your entrepreneurial lifetime.

You also asked if an executive summary is enough to raise a first round of capital. I'd have to say no. Executive summaries are just the start of an exchange of information. Investors will want to "drill down" or learn more about your target market, your competition, technical risk factors and evidence that people or companies are prepared to buy your solution. They will also want to know what additional money will be needed, and when, to test, produce and commercialize your product.

So what can you do to advance your position? Here are a few recommendations:

1. Improve your plan during off-hours. Pay extra attention to product development timelines and thinking through potential development delays. Consider raising more initial money to adequately test the prototype to help position you for the next investment round.
2. Develop an investor solicitation list. Talk to other CEO's of technology companies to gain leads to local angel groups. Talk to lawyers and accountants who serve the local venture community for ideas. Cold call at least one new person every week. Hold off making formal investment presentations until you are really ready to present your best.
3. Start saving your money. You never know what personal resources you will need once you eventually leave your job. It's also wise to research lowest cost health insurance options. It may be from your current employer through federally-mandated COBRA regulations.

Thomas Edison once said "Genius is 1% inspiration and 99% percent perspiration." Investors believe this too. So expect them to focus not so much on your initial idea but how you will develop this idea potentially while employed elsewhere. The more you can gain investor confidence in your development path, the faster you will enter the great entrepreneurial frontier.

Take Command Action Step

Once you have determined you want to move forward on your side-line venture, be sure to formally establish the venture's company name, tax identification number and business structure. This way you can start to establish a paper-trail of technology ownership under the business entity. You can do it!

Do you need time-saving tips to help fund and grow your business? Ask Susan How! Write to small business funding expert Susan Schreter at susan@takecommand.org

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