Venture Capital: Road to the Neopets Stock Market

     Let us go back in the past to when it all began…

     In a spacious office of the Virtupets Space Station complex, Winston busied himself with his new job, having just finished five long years in academia. Posters of Dr. Sloth adorned the walls, as is customary of successful businesses to show appreciation for one of the most eminent entrepreneurs Neopia has ever witnessed. As Winston prepared to leave for a quick snack break on the recreation deck, a new Neomail alert popped up on his monitor:

     To: Winston (Associate)

     From: Lawyerbot (Partner)

     Re: New Business

     Congratulations on your recent graduation from Judge Hog Law School. I am pleased that you’ve joined our law firm. For your first assignment, I met yesterday with the founders of a new business. Our firm, Lawyerbot, LLP, has been retained in connection with the formation of the business and will serve as its primary counsel. The founders would like to name the company "Alien Aisha Vending." As the new associate, I would like you to be their main contact person at the firm.

     Since Alien Aisha Vending has not yet been formed, one of the first issues to address will be entity selection—what form of business this will be. Alien Aisha Vending’s founders utilize a luck game concept. This game is based off a vending machine. However, instead of just putting in Neopoints and the machine dispensing food of your choice, you won’t know what you will get! The founders would like to introduce a new currency for their vending machine, called a "Nerkmid". Put a Nerkmid into the machine, and you’ll be rewarded with some amount of Neopoints along with an item. Right now, they’re still working on what item prizes will be possible, and are in negotiations with some other companies for a potential joint-venture. The main prizes that will keep people addicted to the vending machine will be Paint Brushes. This idea is currently unlike any other on the market.

     The founders of the company and developers of the vending machine’s software are Farvin and Sophix, who met while both students at the Virtupets Graduate School of Technology. While at Virtupets School, Sophix developed the idea for Alien Aisha Vending and completed early work on the concept. Since graduating, Sophix has continued developing the concept. Farvin completed his studies about a year before Sophix, and left to work for Dr. Sloth. However, after twelve months on the job, Farvin was disappointed with his level of responsibility and autonomy and, after discussing it with Sophix, returned to Virtupets to perfect Alien Aisha Vending’s luck game concept.

     Farvin and Sophix are still in the development phase with their concept and envision that if they go it alone—that is, they do not seek financial support from investors—it will take them another 12 to 18 months to get the concept ready for initial (or beta) testing. Alternatively, they could cut this time in half and have the product ready to market if they were able to obtain several million more Neopoints. Farvin and Sophix believe that if they choose to pursue this course, the initial capital could be raised from family and friends, but that the several million Neopoints will need to be raised from professional investors or a strategic partner.

     Based on conversations Farvin and Sophix have already had, they believe the initial capital could come from a group of seven investors. Farvin and Sophix made it clear that they are nervous about the decision of taking on friends and family as investors. If they do, they want to be fair, but they also want to be sure that there is no issue about their ability to be in charge of the management of Alien Aisha Vending.

     In addition, and what prompted their call to our firm, Farvin and Sophix have been contacted by Grundos Cafe, a leading food supplier. Since vending machines traditionally provide food, Farvin and Sophix are interested in the idea of including food in the prize pool. They said that Grundos Cafe was reaching out regarding a joint venture to provide the funding necessary to finish the development of Alien Aisha Vending’s technology and then to produce, market and distribute Nerkmids. Farvin and Sophix are keen on the idea and have scheduled a preliminary meeting with Grundos Cafe next week. More details should become clear then.

     As to our firm's role, in addition to our business entity selection analysis, we need to be prepared for the first steps on that potential joint venture transaction. For now, please think about the following:

     1. What form of business entity is to be used? What will the governing structure be?

     2. How will the business make money? If there is an existing competitor, how does the new product differ from those of the competitor? Who are the prospective customers?

     3. What are the available sources of financing? How will the business attract the necessary investors?

     I will be in touch with you later regarding the matters that arise in serving this new relationship. Thank you for your help!

     Winston sighed. It’s been a few years since he had taken the class on Corporations and Business Entities. However, he needed to prepare well for this first meeting with Farvin and Sophix. Now, it was time to begin research.

     As Winston headed to the Virtupets library, he passed by Grundos Cafe and decided to check out what food they’re offering today. The sweet aroma of Roast Gargapples greeted his senses as he stepped in the shop, and a row of piping hot Spotted Pudding with Custard lined the display racks.

     "I can see this potential joint venture working out pretty well with such tasty foods," Winston mused.

     "Can I get you something, sir?" asked one of the Green Grundos working behind the counter.

     "Sure, I’ll try one of your specialities please, the Grundos Luxury Kebab,” replied Winston.

     "One spicy kebab coming up!" the chef Grundo announced as he assembled the dish.

     Minutes later, Winston left the shop a very satisfied customer and continued on his way to the library, ready to begin his work in earnest.

     Three days later in a brightly-lit office of Neopia’s premier law firm, Winston sat at a large conference table facing his two Aisha clients, both of whom wore dapper suits and looked at him attentively.

     "Welcome to Lawyerbot, LLP. My name is Winston, and I’ll be your main point of contact here. Thank you for choosing our firm to be your primary counsel in the formation of Alien Aisha Vending. I’d like to know what your current business structure is. Have you formed any contracts with anyone?"

     "For now, the two of us have just been talking about our options, and there have been no formal contracts signed, even between ourselves," Sophix stated.

     "We also need some recommendations on what will best suit our needs and our ambitions of a Neopia-wide enterprise with far-reaching influence," added Farvin.

     "First, I’ll go over the main business entities, and the pros and cons of each. We have to decide two main questions. Both, what will the business entity for the company be, and where will it be incorporated? Please feel free to ask any questions you might have." Winston pulled out a guide that he had made, comparing the forms of business entities.

     "I understand that you’ve retained separate tax counsel to advise you on the taxation issues, so we will only address them briefly, as it pertains to making an informed decision." Winston handed the papers to Farvin and Sophix to peruse.

     Introduction: A business entity means an organization created by an individual, or individuals, to conduct business. This decision is important because it will determine the legal and financial backdrop for the business. Different Neopian lands will have different laws, depending on what kind of entity a business is.

     The options: The general partnership is legally defined as an association of two or more persons to carry on as co-owners in a business for profit. However, a drawback to the partnership form of doing business (at least from the perspective of the individual partners) is the unlimited personal liability imposed on each of the partners for the business debts of the partnership.

     The Limited Liability Company offers three important attributes that many new businesses seek: (i) limited liability, (ii) the ability to participate in business management, and (iii) favourable income tax treatment.

     The modern corporation originated in Neopia Central approximately two decades ago, where it was primarily used to organize ventures of great public importance, such as universities. Corporations are strictly governed by a set of laws, known as the Neopian Model Business Corporation Act, or NMBCA. It’s important to note that in a corporation, the management structure is different. Directors are the main ones in charge, and manage all the business affairs. Shareholders elect the directors, and then directors appoint officers. Shareholders have no control over officers. Although shareholders are technically the owners of the corporation, they will have little to no control over the business affairs of the corporation. In contrast, in a general partnership and a limited liability company, the individual founders can retain managerial control.

     "Right now, we’re not sure if we should incorporate in Virtupets, or Neopia Central. I understand that those are the two main lands that we should consider. Would you be able to go over more of what that entails?" Farvin asked.

     "Incorporating a business means deciding the land that it will be founded, or based in. It also means making the business a separate legal entity from its founders. An incorporated business acts independently of its owners. It’s important because this gives the ability to issue stock, which we will address at a later meeting. Issuing stock is a way to attract potential employees and investors. Incorporating also provides protection. Right now, if anything were to go wrong with Alien Aisha Vending, the two of you would be personally responsible. Incorporation would prevent your personal assets from being taken to cover the liabilities of the company." Winston explained.

     "Each Neopian land has different laws when it comes to businesses. Because you two are based in Virtupets, that is one option for land of incorporation. Most businesses are incorporated in Neopia Central. Because of this, Neopia Central’s law and judicial system is used to dealing with business entities. On the contrary, benefits such as protection for founders and shareholders is not as established in Virtupets. You’ll have to consider your short-term and long-term objectives." Winston continued.

     "Ultimately, you want to pick a land and a business entity that will facilitate both of these business objectives. Once the structure of a company is established, it takes on a life of its own, and is not easy to alter. Anticipating problems that are likely to arise in the course of growing a new company will help you to minimize future obstacles and maximize your flexibility to take advantage of new opportunities. Regardless of which option you pick, the necessary steps to incorporating are: i) preparing and filing the articles of incorporation, ii) conducting the organizational meeting of the initial board of directors, iii) preparing and adopting bylaws, and iv) issuing shares."

     Although it didn’t seem very interesting because there was no practical application at the time, Winston was now very glad that he had taken a class on Corporations while in law school.

     "We’ve given it some thought, and we think that a limited liability company would be the best idea for Alien Aisha Vending," Sophix and Farvin nodded in agreement.

     "Since we do intend on growing the company and attracting investors, and hopefully making this the most successful luck game in Neopia, a general partnership seems too small. On the other hand, since we are a new company and would like to be actively involved in decisions and the direction of Alien Aisha Vending, a corporation gives away too much control." Sophix reasoned.

     "The decision to incorporate in Neopia Central also seems to be the natural one, since the laws in Neopia Central are more set up to deal with business." Farvin remarked, seemingly convinced of this direction.

     Winston and the two Aishas proceeded to finish the meeting on a cheerful note, and arranged for the next steps in the establishment of what will soon be one of Neopia’s most popular pastimes.

     To be continued…