Zaarly on Capitol Hill: Why the Startup Ecosystem Matters

5/13/11

On Tuesday, May 10, 2011, I had the opportunity to participate in a hearing convened by the U.S. House of Representatives Committee on Oversight and Government Reform. This was an incredible honor as an entrepreneur to sit on a distinguished panel and speak directly to leaders in the House of Representatives and from the Securities and Exchange Commission on matters that impact startups.

The hearing was called “The Future of Capital Formation” and was designed to discuss ways that the government could reform existing rules and regulations to help entrepreneurs, small businesses and startups better gain access to capital. As a former startup lawyer that worked with lots of entrepreneurs and startups, and a current entrepreneur here at Zaarly, I know firsthand how important this issue is. And that’s why I felt it was important to share some lessons from the front lines of the startup world.

One of the most important lessons that Zaarly has taught me is how crucial it is to have access to funds in order to build a business and build it quickly. I consider us extremely fortunate to have presented our idea at Startup Weekend Los Angeles and quickly used our success that weekend to raise funding to help build the business. That initial capital helped Zaarly build its prototype for South by Southwest, make our first hires, open an office and ready our product in record speed. All of that fast-success is thanks to having available funds to grow the business and not to have to spend time and energy fundraising.

If anything, the story of Zaarly is a perfect example of why streamlining the rules and regulations for raising money is so crucial. And that’s why I’m so thankful for this opportunity and passionate that it is our duty and responsibility to help others in the startup ecosystem.

My Recommendations to Congress and the SEC

I don’t begin to say that I’m an expert on anything, but I have spent a significant portion of my career helping entrepreneurs think about raising capital. And what I know is this: raising money is not easy; rules governing raising money are complicated and working with a lawyer to decipher them is expensive; and we need to rethink the rules that limit the ability of startups to raise money.

With those things in mind, I came up with four key recommendations for Congress and the SEC that I presented to the leadership. While these are not a silver bullet nor will they necessarily help all entrepreneurs, I think that these are part of a package of reform to help:

—Private Company Fundraising and Financing Regulations:

In general, I believe that regulations governing private company financing be thoroughly examined with an eye to decrease the regulatory scope, simplify procedures, and ensure that the cost-benefit of regulations for raising funding for small investments be met. Investors continue to be in the best position to protect themselves in their investment decisions. This may include contractual requirements for audits of financial statements, seats on a board of directors, or the receipt of regular financial statements.

First, I encourage the removal of the Ban on General Solicitations, which limits the ability of private businesses to locate and identify prospective investors.

Second, I encourage the creation of regulations to extend/expand the concept of accredited investors to individuals that are deemed to be sophisticated based on their knowledge, experience, … Next Page »

Eric Koester is co-founder and COO of Zaarly and an attorney, formerly with Cooley LLP. Follow @

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  • Gary Masner

    Eric,
    Great ideas, but let me add another piece to focus on. I retired after 10 years in Silicon Valley VC trade, and have been volunteering helping Colorado startups raise money. Most of these are good business ideas, but will never go public or raise VC money. They don’t want a C corp structure and look to angel investors for equity. The problem is the complexity of K-1 reporting for investors and the treatment of income. Investors are often repaid out of cash flow.
    We need a new form of tax structure for startups. Maybe a 10 year transition to a C corp structure, with investor paybacks being tax deductible to the company and capital gains to the investors.

  • marshall sterman

    concur with Eric’s recommendations/thoughts/observations but they do not address the need to change the mentality/anti-capitalistic/we versus them mentality of our regulators. The excess time/costs/inordinate delays over language/munitia in getting to final approvals has killed more financings than any rules and regs that most of us also regard as excessive.

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