Newsmaker 2012

What I learned at DEMO 2012 – by Nick Hughes

The DEMO conference, held each year in Silicon Valley, has been home to many successful product launches over the last decade.  I was honored to be in attendance this last week in Santa Clara and it did not disappoint.  For those who aren’t familiar with DEMO, it’s an event where scores of startups have 6 minutes to present their product on stage.  At the end, a few awards are given to winners voted by a panel of investors and journalists.  The trip was actually the winning prize from the SURF Incubator pitch competition we won in June.  Before I go any further I want to publicly thank SURF Incubator for the opportunity and I hope we represented you well.

Although we didn’t present or pitch on stage I definitely had a great time.  Here’s Ray Kurzweil speaking on what he see’s as the future of technology.  Things are about the get crazy cool and I’m very glad I was sitting there that day!

The event – one I won’t forget for a number of reasons – was notable, tiresome, and educational.  We spoke with a number of other startups and were shocked at how strong our pitch has become, even to other entrepreneurs.  It’s pretty cool to see others grasping your concept and actually wanting to use it themselves and integrate within their offering.  The trip in itself was very travel intensive, which takes its toll on you mentally and physically.   We spent way too many hours on public transportation, that’s for sure.  But the biggest thing that stuck with me was how much you can learn by just observing people.  As I closely watched the presenters, I noticed a few things that I feel are not covered enough in the media, lessons us “early stage” founders desperately need.   I realized by following a few simple principles any founder can successfully demo their product and impress an audience.


The truth is, as an attendee watching all the DEMO’s you get quite restless and bored.  This is natural when you are indoors seeing 75 companies parading across the stage throughout the two-day event.  As a presenter, you must understand people are drawn into passionate communicators and distaste anything boring or monotone.  I watched most of the presentations during the event, and I was struck with how many presenters lacked expressive passion for their concept and cause.  They might have had some really cool tech but I wouldn’t have know it by how little they expressed their excitement.  Maybe they were nervous or something, but for whatever reason they did not positively influence me on what they were trying to DEMO.

To me, as an attendee, if the presenter did not elicit belief and passion as they spoke about their product, I tuned out.  It became background noise and monotone distraction to me and my iphone.  You think I am alone?  Occasionally I would glance around to the crowd only to see most attendees face lit up with some sort of device in front of them.  This is something all presenters should not overlook.  Today, you need to give people a reason NOT to grab their phone and play with it.  The best presenters were passionate in the right way, and helped me become passionate about their concept, albeit even for just a few minutes.  It’s notable to mention EVERY award winner passed my passion test.


In addition to passion, presenters must employ a great deal of poise when on stage in front of hundreds of people.  This is challenging yet probably the most important aspect of public speaking.  Face it, people are very superficial and if a presenter doesn’t come across comfortable, collected and confident the audience will immediately judge negatively.

The presenters that most impressed me were the ones that came across the most comfortable, confident and collected.  In a word, they were very poised onstage.  They told me, through their non-verbal cues, “I am the expert on this subject at the moment one the one you should be listening to.  Our market leading product is one you definitely need to check out.

Unfortunately, a few of the presenters actually froze on stage and forgot what they were going to say.  This is not a good outcome, especially when being onstage in front of investors and media could result in great fortunes for you and your company.  The result, for me as an attendee, was I didn’t really understand what they were doing (in addition to feeling really uncomfortable).  The result for them, probably very little investment leads.  Whatever it takes, speakers must get prepared!


Great product demo’s lead the audience on a journey of discovery into insights and personally useful information.  If not, it’s a waste of six minutes of a person’s time and attention (yes, this is what we all are thinking).   The successful demos all encorporated concepts or illustrations that instantly became relevant to me and others in the room.  One of the startups, StressFriend, has released an app plus wristwatch called Bandu that monitors your current level of stress and displays it in real time on the smartphone app.  Not only that, it maps my stress areas on an interactive map so I can see where I am stressed and where I’m calm.   It’s awesome, and something our society really needs so we can all just chill out!  During their demo, they actually had a drill sergeant come out from behind the stage, yelling and screaming in the face of one of their team members in the audience.  On the big screen, they showed his stress levels changing in real time.  Indeed, they were one of the award winners.  The relevance here is obvious; we all are stressed, we all hate raging people and we all felt it at that moment.  They brought it home!  You gotta believe very few people in the room were messing around on their phone or tablet during their presentation.

Winning pitch competitions can be the difference between gaining media attention and millions of investment dollars… or not.  It doesn’t have to be that difficult, you just need to follow a few major principles.  First be a passionate communicator so the audience feels you and your cause.  Second, be confident and have poise on stage in front of the crowd.  Lastly, no matter your product you need to present a story in which everyone can relate.  These three simple things will go a long way to help with your next demo and hopefully launch your startup successfully.

SURF Incubator Fosters Disruptive Technology

SnapSwap Entrepreneurial Spirit Knows No Borders at SURF Incubator

SURF TV – Steve Seow from BizSpark

SURF TV welcomes Steve Seow, an Architect Evangelist at Microsoft who facilitates entrepreneur and developer support through the BizSpark program.

About BizSpark: Microsoft BizSpark is a global program that helps software startups succeed by giving the access to Microsoft software development tools, connecting them with key industry players, including investors, and providing marketing visibility to help entrepreneurs starting a business.

About SURF Incubator: SURF aggregates community support to provide digital entrepreneurs with subsidized office space, educational sessions, networking events, business and technical resources, and access to a network of advisers, investors, and corporate partners.

Quote Timeline:
1:50 On the Bizspark program “We give access to most of our software for free to our startups.”

2:11 “There may be times when another startup that may want to collaborate with another startup in the bizspark program. So we try to bridge that conversation.

3:20 “I connect with the starups and the institutions that empower these startups, and see how we can help.”

4:00 On the seattle startup ecosystym “Seattle clearly has set the bar, we have incubators like SURF, a vibrant starup community, we have very creative people.”

5:55 On Windows 8 events “We’re going to think about how to do more of these events and help these starups tap into the huge Windows 8 ecosystem”

Steve Seow, Architect Evangelist

SURF Incubator

Produced by Tim Reha @timreha at New Media Synergy

SURFing the Clouds

SURF Incubator has teamed up with CloudMine to bring Backend-as-a-Service for deploying mobile and web apps to SURF startups. CloudMine’s platform is the fast, secure way to deploy apps and scale them on demand.  Forget about infrastructure hurdles and repetitive development tasks – everything but the design is taken care of whether you have 1 user or 1 Million.


CloudMine iOS SDK Introduction from CloudMine on Vimeo.

An example iOS app build using CloudMine

CloudMine’s service works across all platforms from iOS and Android, to HTML5 for making rich web applications.  Their developer ecosystem supports a range of engineering talent building everything from social photo sharing apps to tools running on medical education point-of-care devices.

SURF is excited to offer this benefit to resident startups. Instead of monotonous maintenance and deployment tasks, developers now have the freedom to focus on creating compelling designs and beautiful interactions.  Check out CloudMine’s website for a deeper dive in to all aspects of their service and dive right in to launching your app.

EXTRA! EXTRA! CloudMine will provide Pyramid Brews and food at SURF’s next happy hour on Thursday, September 20th. They will be conducting a webinar to show off their service and how it can eliminate common deployment and scaling issues.

SURF TV – Talk to the Manager

SURF TV welcomes Talk to the Manager’s founder, John Washam and Director of Business Development, Jeremy Luby.

Quote Timeline  
1:30 “The difference in one star in an online review can be plus or minus a 9% conversion rate” -Jeremy

3:55 “This place just had a crazy amount of buzz…” -Jeremy

5:50 “Seattle’s got it all and SURF is the nexus of where things are happening. Where the next big companies are going to come out of.” – John

6:50 “Our network has just exploded because anybody we don’t know, somebody here knows, and can point us to them.” -Jeremy

8:15 “If you are in the ideation stage and you have an idea and you think it’s great and you don’t know how to turn it into a business I would definitely suggest Founders Institute.” – Jeremy

9:45 “Ask for some love and you will get lots of love” – John

About Talk to the Manager: Receive and respond to immediate, anonymous customer comments by text message. Increase your brand loyalty and boost your customer reviews!

About SURF Incubator: SURF aggregates community resources to sponsor technology startups by providing subsidized office space, educational sessions, social events, and business and technical services within a community of aspiring entrepreneurs.

A big thank you to Tim Reha @timreha at New Media Synergy

Talk to the Manager
John Washam, Founder
@StartupNextDoor Linkedin
Jeremy Luby, Director of Business Development
@jeremyjluby Linkedin

SURF Incubator


10 Tips for Startups Looking for Office Space

Several factors come into play when starting up a new business. First, you need a viable product or service, enough capital to get you going and a great team.

Next, every business needs a home. You’ll not only need to think about what makes sense now but also where your business will be down the road.  The goal is to create an environment that will attract talent and retain valuable employees, while still being affordable and flexible enough to accommodate growth.  Here are a few things you’ll want to consider:

  1. Flexibility: Flexibility in your lease will allow your company to evolve in either direction. A short-term lease or sublease makes more sense for your growing business.  Assignment and sublease rights are critical, and ask for a renewal clause and early termination rights, just in case.
  2. Preserving Capital: Let’s face it: startups don’t have a lot of excess capital. The last thing you want is for a lot of your money to be tied up in a security deposit.  Be savvy in negotiating an amount that is reasonable for both you and the landlord.
  3. Type of Space: Do you want a direct lease with your Landlord or are you open to considering a potentially more affordable and flexible sublease? Would you consider shared space or a collaborative incubator environment? Will you accept the space “as is” or do you want to make improvements?
  4. Rent: This can be quoted as triple-net (NNN) or gross.  Triple-net is the base rental amount but doesn’t include charges for common area maintenance, insurance, etc.  Gross is exactly what it is – all of the applicable monthly fees plus the base rent.  Make sure you understand what is being quoted before signing.
  5. Location: Beyond just the neighborhood or particular building, what type of environment will attract and retain employees? Is the building served by transit? Is parking available? What types of amenities are nearby?
  6. Room to Grow: Your business may be small now but what plans do you have for it in the future? Does the space you’re considering include expansion rights during the term of your lease?
  7. Culture: What type of culture are you trying to create for your business? What is the look and feel you are hoping to achieve? Do you want open space versus private offices, or loft space versus traditional space? What environment will best suit your type of business?
  8. Building Amenities: This goes beyond just what the neighborhood provides. Does the building have shower facilities? Lockers? Bike racks? Parking? Food services? What will your employees require?
  9. Costs Beyond Rent: Be aware of extra costs that you may be incurring beyond just the rent. Will you be paying for Internet and phone service, furniture, parking, security, etc.? If you are in a shared space, will you be paying for additional support services?
  10. Landlords: Know your future landlord.  Do they have other startups as tenants? Do they understand the unpredictability of early stage companies and do they have a reputation of working with their tenants?  A solid working relationship here will yield benefits down the road.



Above all, make sure you read and understand your lease agreement.


Pat Pendergast is a founding member of Washington Partners, a Puget Sound based real estate firm focused on tenant representation of technology firms. More information can be found at

Looking for another way to fund or invest? What you should know about federal income tax issues associated with convertible debt.

By Dan Wright, CPA and Karlyn Kurokawa, CPA


Convertible debt is debt financing that has a feature allowing the debt to be converted to equity, often at the option of the investor, in the event of a default on repayment terms. Many start-up companies use convertible debt as a way to attract short-term investment. Convertible debt has appeal to investors because it can provide enhanced risk protection, while at the same time allowing for participation in the appreciation of the company as the value of the stock increases.  It has appeal for start-up ventures because the cost of issuing convertible debt may be lower, and it can result in access to funding in a shorter time frame than issuing an additional round of equity.

Understanding the federal income tax consequences to the holder and the issuer can be daunting, depending on the complexity of the terms.  For instance, questions arise as to when interest is reportable by the holder and when the issuer (the start-up company) receives interest deductions.  Over the course of the term of the instrument, other questions often arise as well, such as whether or not the lender/investor recognizes gain on conversion, the tax consequences of accrued but unpaid interest at the time of conversion, and how to determine the holder’s basis in stock received on conversion.

We have included below a short list of the most common tax questions we receive related to convertible debt, along with what are intended to be straight forward answers. To keep the discussion simple, we have assumed that the debt instrument in question contains traditional debt terms; i.e., the instrument has a fixed repayment date, a fixed interest rate, and a stated principal amount.  No principal payments are due on the note until maturity. The only way the note differs from a traditional short-term debt instrument is that it contains an embedded option for repayment with stock of the issuer rather than cash. We have also assumed that the holder pays cash equal to the stated principal amount upon receipt of the note.  Please be aware that instruments that contain more complex or non-traditional terms may result in tax consequences that are different than those discussed below.

Q1 – How is a convertible note characterized for federal income tax purposes (i.e., debt or equity)?

Since a convertible note has both debt and equity features, settling this question is fundamental to determining the tax consequences to both the holder and the issuer. Generally, a convertible note is considered purely a debt instrument until it is converted. This means that even though the instrument contains an option that has value, the option feature is ignored in the exchange.  As a consequence, the holder of the instrument has no gain associated with receipt of the option feature when cash is exchanged for the note.  For purposes of determining the holder’s basis in the note, the option is ignored.  No bifurcation is required between the debt and the option element of the instrument.

Contrast this result with a situation where, in addition to the convertible note, the holder receives a separate instrument that entitles to the holder to purchase the issuer’s stock at a favorable price (i.e., a warrant).  Assume no additional consideration is exchanged for the warrant.  The warrant is added to sweeten the deal for the creditor.  Unlike the embedded option, if the separate warrant has value, the investor must treat the transaction as if a note and a warrant are purchased.  Here, the holder must assign a basis to each instrument.  To do this, the cash payment to the issuer must be bifurcated between each instrument based on the relative value of each instrument.

Example 1.  Assume a lender loans $10,000 under the terms of a convertible debt instrument, and in conjunction with making the loan also receives a warrant allowing for the purchase of additional shares of common stock independent of whether or not the debt is converted.   Also, assume that the warrant has a value at issuance of $400.   For purposes of determining the lender’s basis, the cash paid to the issuer must be t bifurcated, i.e., $9,600 to the note and $400 to the warrant.

Q2 – When must interest be recognized by the creditor/investor?

If the note requires regular payments (at least annually) of interest and if those payments are made timely, then the creditor/investor recognizes the interest income when the interest is paid.   This assumes that the stated interest is at least as high as the published federal interest rate (referred to as the “applicable federal rate” or AFR).  It also assumes that the creditor/investor is a cash basis taxpayer.

Often, the instrument requires that interest accrue on the note, but it is not paid until the note matures.  In this case, creditor/investors may be surprised to receive a 1099 for interest income when they have not received any cash payments.  In this situation, federal tax rules require that even though the interest is not paid, it is still treated as paid if payments are not made at least annually.  Hence, the issuer must issue Form 1099s to non-corporate creditor/investors. Assuming the creditor/investor actually receives the accrued interest in the form of a cash payment at maturity, the creditor/investor is treated as having basis in the cash payment to the extent the interest has been previously reported. Similar rules apply when the debt instrument does not specify an interest rate or if the interest rate is below the AFR.   In this case, the issuer of the note also receives a tax deduction for any interest that is reported to the creditor/investor in the year it is reported.

Example 2.  Assume a start-up company issues convertible debt of $10,000.  The annual interest rate is 5% and no payment of interest is required until the note matures.  Even though the company will not be making annual interest payments until maturity, the lender will still receive a 1099 reporting $500 of interest income for years 1-3.  In addition, the company will be able to deduct this amount as interest expense for each of the three years.

Once the company repays the principal and the interest at the end of year 3, the lender will have basis in the payment of interest equal to $1,500, or the amount of previously reported interest income.

Note that in a situation where the note does not require interest (or has a stated rate that is below the AFR discussed above), the note must be carefully analyzed to determine if it is “debt” under federal tax law.   Assuming it is considered debt, the complex “original issue discount” (“OID”) rules apply.   When these rules apply, interest is imputed based on a set of financial math rules contained in the federal regulations.  Again, even though no cash was received, the lender must report interest income.   There may be a Form 1099 filing requirement, and the issuer receives an interest deduction.

Q3 – What if stock received upon conversion of the note has a value higher than the principal amount of the note?

The IRS has issued a ruling indicating that no gain is recognized when the note is converted into stock ownership.  The basis of the stock is equal to the holder’s basis in the note immediately before conversion.   The holding period of the stock begins at the time the debt was issued.  No gain is recognized by the issuer of the note on conversion.

Q4 – What if there is accrued (but unpaid) interest on the note at the time of conversion, and rather than receive a cash interest payment, the lender receives additional shares? 

The lender still must report that accrued interest as if cash was paid at the time of conversion.   The rules treat the transaction as if cash was paid to the lender and then the lender immediately purchased the additional shares.  The issuer must issue a Form 1099 to non-corporate lenders, and is allowed a corresponding deduction for the accrued interest settle with the stock payment. .

Example 4.  Assume the lender in Q2 converts the note to stock on June 30th of year 3.  At that point  $250 of interest has accrued during year 3, and the issuer issues additional shares of stock for all of the accrued, but unpaid interest of $1,250 ( i.e., $500 for each of years 1 and 2, and $250 for the first half of year 3).  The lender will receive a 1099 for year 3 reporting $250 of interest income, and the company will have a $250 deduction for interest.  The lender will have basis in the shares received of $11,250 ($10,000 for the amount initially advanced to the issuer, and $1,250 for the interest income reported in years 1-3).

While the above discussion addresses the tax issues associated with a basic convertible debt instrument, please beware that there is a wide variety of terms that are commonly used in today’s market place.  The actual tax results associated with more complex instruments can vary significantly, depending on the actual terms of the instrument.  Sometimes these instruments call for contingent cash payments during the term of the debt, and often warrants are issued alongside the debt instrument.  Premiums and discount rules may also apply.   All of these variations can affect the amount, timing and character of income associated with the transaction. If you are considering an investment in the form of a convertible debt instrument, you should discuss the exact terms of the transaction with your tax adviser before committing yourself to the investment.

Dan Wright is a tax principal at Clark Nuber where his practice focuses on serving emerging businesses. His areas of expertise include federal and state taxation of technology companies, executive compensation arrangements, choice of business entity issues, and business buy/sell/combination transactions. Dan holds a Master’s in Taxation degree from Brigham Young University. Co-author Karlyn Kurokawa is an associate in Clark Nuber’s Tax Services Group; she holds a Master of Professional Accounting in taxation from the University of Washington.

This entry first appeared on on June 2, 2012. 

SURF Launch Party Recap

The SURF launch party last Friday was a resounding success. With over 300 members of the tech community in attendance, it made for a truly remarkable evening. For us, it was more than a launch party. It was an opportunity for us to showcase some of our residents and allow them to tell their story. Ten resident startups had the opportunity to pitch their company, with the winner earning the chance to participate in DEMO 2012 in San Francisco. That award went to Nick Hughes, CEO of Seconds; an ecommerce program that provides text payment services.

The launch party also gave us the opportunity to announce the beginning of SURF TV. Produced by New Media Synergy, it is a weekly production  featuring interviews with local startups, tech leaders, and features from the tech community. Our first broadcast was at the launch party and here is a video with some of the excerpts.