Happy Halloween!
October 31, 2007
Building your own software? Make sure you include ‘tests’!
October 30, 2007
Turns out everyone thinks it is easy to develop software these days (including us). What, with the Ruby on Rails framework anyone can write beautiful code, right? Sure, but do you know what to include with your code? Two years ago we built a number of ‘web 2.0′-style applications using Ruby on Rails. Want to know a secret? We didn’t have any idea what we were doing. Sure, we thought we knew what we were doing, but at the end of the day we built a load of crap (we released the crap using the GPL so if you want to see the source code you are welcome to it).
We had to get serious about our software development efforts because our clients were serious about keeping their applications up and running. After we got ‘real‘, we realized that only 50% of our software development effort is related to the code that makes the application run, while the other 50% of the effort is related to ‘tests’ to make sure the application keeps running as things change.
On the Architel side I have encountered more and more customers who rely on software developed either in-house or by a third-party. In three cases this week I have encountered source code in ‘make or break’ web applications (i.e. the company’s revenue is directly tied to their applications), but in all three cases no provisions were made for ‘tests’. Applications are becoming more and more complex, requiring integration with third-party APIs, remote database servers, Amazon S3 and so on. Make a single change and and application might not work, but the fact that it is no longer working might not be that obvious. Of course these customers want Architel to monitor their applications and keep them running despite the fact that they have multiple developers and managers make changes all of the time? If you are having software built for your company, make sure your scope of work includes various methods to ensuring the application works (i.e. notifications for failures) and also include as many tests as possible so that when you make changes or additions to your code you will understand how those changes affect functionality. Just my two cents…
Need a founder?
October 29, 2007
Starting a business? Get on a plane first!
October 27, 2007
Guy Kawasaki is blogging about his visit to Mumbai, India in a post titled, Mumbai Guy. Reading about his experience reminded me of my own visit to Bangalore, India this summer and it got me thinking about the people I meet here in Texas who want to start their own business.
Lots of people contact me to invest in their idea or for a referral to someone who might. I usually always spend a little time chatting with them, despite the fact that we are not actively investing in startups (besides our own). More often than not people are looking for money for all of the wrong reasons.
One great example is someone who contacted me about a consumer facing product made out of plastic. It is basically a licensing deal, but they need some samples to get across the goal line. If they only had $50,000 they could get their 3D CAD injected molded samples made and close the deal. I really liked the idea and decided to do a little digging. I got on the phone with a friend in the plastics business and he agreed to have a small run of 10 units produced as samples for free! He wanted the right/option to match the best price I could find when we were ready for mass production in exchange for the samples. Sounded fair.
I then called up the entreprenuer and explained that I had someone who would do the samples for free and suddenly the story changed. I won’t get into details, but what he really needed was a job to pay his rent and his electric bill. He was hoping that his investor would float his lifestyle AND fund his idea. Question to entrepreneurs: if you can’t manage your personal finances why in the world would I trust you with my money?
My advice? Go to India and witness how entrepreneurs with 10% of the resources available to Americans can create viable businesses. These guys have to deal with daily electrical outages, old computers, faulty wiring, substandard building codes, no air conditioning; these guys don’t have 90% of what we have, but somehow they are able to start businesses. Climb back into your business class seat, drive to your comfortable home in the suburbs and tell me you need more money for a laptop or a phone system. I bet you will realize that you don’t need as much as you thought. The ironic truth is that with less, your result will undoubtedly be better. Or maybe I am wrong…
Startup Myths
October 26, 2007
Ron Garret has a post on his blog titled “Top ten geek business myths” that I found interesting. The two myths I agreed with most:
- Myth #3: Someone will steal your idea if you don’t protect it.
- Myth #10: Having no competition is a good thing.
I hear #3 all of the time. So many people wait too long to share their idea with anyone. When you start telling people about your idea you are a taking a risk, but not the risk you are scared of. You are taking the risk that your idea will change and ultimately become more than just your idea. Any good idea can be improved upon and the more people you tell the better chance you have to succeed. For me, an idea isn’t real until I tell someone about it.
Number ten is another one people tout as an advantage. When I hear, “and we have no competitors…” I think one of two things. Either you are naive or you are in the wrong space. With six billion people on the planet you were the one who found the one unexploited market niche? Maybe, but I doubt it. Ron sums up his post by saying:
All these myths can be neatly summarized in a pithy slogan: it’s the customer, stupid. Success in business is not about having a brilliant idea. Bright ideas are a dime a dozen. Business is about taking a bright idea and assembling a team that can turn that idea into a product and bring that product to customers who want to buy it. It’s that simple. And that complicated.
Five things startups need, five things to avoid
October 25, 2007
Ben Yoskovitz has five things startups shouldn’t buy. His list:
- Fancy shmancy marketing materials.
- Software.
- Advertising.
- Office Space.
- Staff.
There is a limit to any such advice. As Merlin Mann often says, “Look I don’t make my own ketchup”, but it is always a good exercise to do without before doing with. My Dad thinks I am crazy, but I still approve all purchases for each of our businesses. With just a little push back I find out what we really need and what we really want. What not to skimp on?
- Comfortable chairs.
- Creature comforts such as ergonomic keyboards (if they are requested).
- Bigger monitors.
- Free soft drinks.
- White boards.
Going Pro vs. Selling
Jonathan Abrams decided to ‘go pro’ and turn down a $30MM offer to sell his year-old website (Friendster) to Google. He opted instead to raise $13MM from one of the world’s best venture capital firms, Kleiner Perkins Caufield & Byers. He took a ’success’ and with lots of help from the pros they managed to drive it into the ground (they might still pull something out of the fire, but it is an uphill battle). What went wrong? Harvard Professor, Mikolaj Jan Piskorski points out,
This was a company that had the talent and had the connections. They had this great idea that people really took to. There is no single reason that explains Friendster’s failures, which is what makes it academic fodder. It’s a power story. It’s a status story. It’s an ego story. But largely, Friendster is a very Silicon Valley story that tells us a lot about how the Valley operates.
Before I started LayerOne I had a chance to work with a small company here in Dallas that was making money hand over fist. They had a great little business that was positioned to grow by 10-20% per year with very little risk. More than anything, they wanted to raise venture capital. I think it was more about validation than anything else. It made no sense to me and I said so. The best case scenario would be the eventual replacement of the two owners with more experienced managers. Or they could stay the course and get rich. The picked the former raising tens of millions of dollars, eventually getting replaced and finally losing everything.
Most entrepreneurs are good at starting businesses, but very few of us are good at taking them to the next level. For some of us we simply lack the experience, while others lack the focus. Running a small, profitable business is lots of fun. It is fairly easy and can be very rewarding. I will leave ‘next level’ to guys like my Dad.
Venture Capital Blog List
October 24, 2007
Jeffrey Stewart compiled this list of venture capital blogs. He is a serial-entrepreneur in New York City.
- A Little Ludwig Goes A Long Way by John Ludwig
Founding partner of Ignition Partners - A Sack of Seattle by Andy Sack
About entrepreneurship, Venture Capital, and other topics - A VC by Fred Wilson
Managing Partner of Union Square Ventures - A Venture Forth by Dan Grossman
Discusses ideas regarding VC, technology, investing and policy - ABCDVC by Mark Sherman
Discusses India as the emerging Venture hub - Alsop Louie Partners by Stewart Alsop
Venture Capitalist and former journalist - BeyondVC by Ed Sim
Founding member and Managing Director of Dawntreader Ventures - Bill Gurley’s Above the Crowd by Bill Gurley
VC from Benchmark Capital and before Hummer Winblad Venture Partners - Breakout Performance by Eric Jackson
CEO of Jackson Leadership Systems writes about VC and break-out performance - Brian Berliner’s Brain by Brian Berliner
Entrepreneur/Investor blogs about Venture Capital and Technology. - Burnham’s Beat by Bill Burnham
NY Venture Capitalist intoInfrastructure Software investments - China Venture News by James Borton
News related to China Venture Capital - Christine.net by Christine Herron
Investor, entrepreneur, and kitchen goddess on technology, society, and best practices, works at Omidyar Network - Class V by Sachi Gahan
Principal with CenterPoint Ventures - Cleantech Investing by Rob Day
Principal with Expansion Capital Partners - Deal Flow by Justin Hibbard
Businessweek’s Blog. Provides investing insights and Venture Capital - Deep Green Crystals by Martin Tobias
VC and founder of Loudeye - Digital Micro-Markets by Donna Bogatin
Internet entrepreneur and former international investment banker - EarlyStageVC by Peter Rip
Early-stage Venture Capitalist with Leapfrog Ventures in Silicon Valley - Ego Ventures by Andrew Luter
Co-founder of BaseCamp Capital, a Denver-based private equity incubator - Feld Thoughts by Brad Feld
Managing Director at Mobius Venture Capital - Florida Venture Blog by Dan Rua by Dan Rua
Managing Partner at Inflexion Partners - Fred Destin by Fred Destin
Partner at Atlas technology veteran VC (Europe) - From Istanbul To Sand Hill Road by Baris Karadogan
Partner of ComVenturesHigh-tech - From the inside, looking in by Shinichiro Fukushige
A returnee Venture Capitalist living and working in Tokyo, VC at (Mitsubishi UFJ Capital) - Genuine VC by David Beisel
Principal at Masthead Venture Partners in Cambridge, MA - Global Themes by Shantanu Bhagwat
Partner for Asia for Amadeus writes about Globalization, Venture Capital and related topics - GOLB: Is this Israel? by Ed Mlavsky
Founder and Chairman of Gemini Israel Funds - Israel Venture Capital 2.0 by Daniel Cohen
Partner at Gemini Israel Funds - Israeli VC on Sand Hill road by Tali Aben
First woman partner in an Israeli VC - Jason Ball’s Techbytes by Jason Ball
Technology and Venture Capital blog from a fund manager at London Seed Capital - Jeff Clavier’s Software only by Jeff Clavier
Musings, rants and thoughts of an angel investor and early stage Venture consultant - John Cook’s Venture Blog by John Cook
Reporter explores startups, Venture Capital and life in Seattle’s technology community - Kauffman eVenturing by Ken Berlack, William H. Payne
About the Kauffman foundation - kiteblog by William Tai
Journal of a kitesurfing venture capitalist - Let the Sparks Fly! by Mark Skapinker, Sophie Forest, Tony Davis
From a early-stage software Venture fund - Life With Alacrity by Christopher Allen
Founder, Alacrity Ventures - McInblog by Ryan McIntyre
A VC from Mobius Venture Capital - Mr Wave Theory by Mr. Wave theory
Retired Silicon Valley Venture Capitalist turned blogger - Nivi blog by Nivi
Advisor, and a former associate at Atlas Venture - Noam Wasserman’s Founder Frustrations blog by Noam Wasserman
Professor in the Entrepreneurial Management unit at Harvard Business School - Northwest VC by Steve Hall
Seattle-based Venture Capitalist with Vulcan Capital (and former New Yorker) - Nothing ventured, nothing gained by Jeremy Levine
VC from Bessemer Venture Partners - Now What? by Scott Maxwell
Boston-based venture capitalist with OpenView Venture Partners - Occam’s Razor by Marc Goldberg
VC/Blog focused on building global European IT companies - Our Man in Nirvana by Robin Bordoli
Former Principal at Mobius Venture Capital - Oxyfish by Tom Shields
From the Woodside Fund - PascalsView by Pascal Levensohn
Founder of Levensohn Venture Partners - Paul Kedrosky’s Infectious Greed by Paul Kedrosky
Venture Capitalist, media personality, speaker, and entrepreneur - PureVC by Jchen/Senior Advisor to CXO Ventures
About Venture Capital, private equity, technology, and the markets - Redeye VC by Josh Kopelman
Managing Director of First Round Capital - Rodrigo A. Sepúlveda Schulz by Rodrigo Sepúlveda Schulz
Internet entrepreneur, consultant and Venture Capital professional - Sand Hill Slave by Wendy Kroy
Executive assistant in a VC firm - Seeing Both Sides by Jeff Bussgang
General Partner at IDG Ventures, an early-stage Venture Capital firm in Boston - Seriously clueless by Anand Sridharan
Associate at Bessemer Venture Partners’ Mumbai office - SF Venture by Keith Benjamin
Perspectives on Venture and related topics - Signum sine tinnitu–by Guy Kawasaki by Guy Kawasaki
Managing Director at Garage - Six Kids and a Full Time Job by Michael Eisenberg
Partner at Benchmark Capital - Soaring on Ridgelift by Stu Phillips
Managing Director of Ridgelift Ventures - Southeast VC by Jason Caplain
General Partner and co-founder of Southern Capitol Ventures - Startup Review Blog - Analyzing Web Success by Nisan Gabbay
Profiles successful Internet start-ups in a case study format - Startups and Angels: Along the way to success by Tim Keane
Director of the The Golden Angels Network, and entrepreneur-in-residence at The Kohler Center - TahoeVC by Robert Goldberg
About Venture Capital, Business Models and some topics on economic theory - Taulli.com by Tom Taulli
News and analysis of companies on the cutting-edge by author and start-up advisor - Tech - Startups - Capital - Ideas by David Feinleib
Director of Mohr Davidow Ventures - Technofile Europe by Max Bleyleben
European technology deals, entrepreneurship, cool technologies and a bit of culture - Texas Startup Blog by Alexander Muse
Features profiles of Texas startups with a focus on entrepreneurship, venture capital, open source and technology. - The Coffee Shops of Mayfair by Paul Fisher
Associate director of First Capital on European technology, Venture Capital and growth business - The Equity Kicker by Nic Brisbourne
A VC partner (Esprit Capital Partners) view from London on all things Venture Capital - The J Curve by Steve Jurvetson
The J in DFJ - The NVA Blog by Ari Newman
From Newman Venture Advisors, LLC - The Perceptions and Reverie of an Investor and Entrepreneur by Bradley Twohig
Works for Insight Venture Partners - The Post Money Value by Rick Segal
Principal at J.L Albright Venture Partners - the vc in me…. by Raj Kapoor
Managing Director at Silicon Valley Venture Capital firm Mayfield Fund - This is going to be BIG! by Charlie O’Donnell
Previously an analyst for Union Square Ventures - Tim Oren’s Due Diligence by Tim Oren
Partner at the Venture Capital firm ‘Pacifica Fund’ - TJ’s Weblog by Torsten jacobi
Start-up entrepreneur onTechnology, Venture Capital and Entrepreneurship - Treading the VC waters by Sagi Rubin
Associate with Gemini Israel Funds, an early stage technology VC - Union Square Ventures by Brad Burnham, Fred Wilson, Andrew Parker
Venture Capital fund located in New York City - Yes, their site is a Blog - VC Adventure by Seth Levine
Principal at Mobius Venture Capital - VC Circle by Sahad P.V.
Assistant editor of Business Today on Indian Venture Capital, Private Equity, - VC Confidential by Matt McCall
Managing Director of DFJ-Portage Venture Partners and Portage Venture Partners - VC Ratings: Rating venture capital deals, investors, exits by Joshua Jaffe
About Venture Capital deals and investors - Vcball by Steve Brotman
Runs Silicon Alley Venture Partners - VCMike’s Blog by Mike Hirshland
General Partner with Polaris Venture Partners in Boston - VCMom by Michelle Goldberg
Principal with Ignition Partners - Venture Capital Blogs by Andy Angelos, Ian Cooper
Blogs from American Venture Magazine - Venture Capital Phoenix by Morris Callahan
Repository of Venture Capital information by a Venture Capitalist and Venture Capital attorney - Venture Chronicles by Jeff Nolan
Former Venture Capitalist for SAP - Venture Explorer by Vbuch
Venture Capitalist based in Menlo Park - Venture Intelligence by Arun Natarajan
Founder of Venture Intelligence, focused on entrepreneurship, Venture Capital and business - Venture Law Lines by Suzanne Dingwall Williams
Fashion forward thoughts of a lawyer and former VC - Venture Midwest by Andy Angelos
American Venture Magazine-Great Lakes Region Editor’s blog on technology and Venture Capital - Venture Voice by Gregory Galant
Producer of Venture Voicea podcast that profiles entrepreneurs and Venture Capitalists - VentureBeat by Matt Marshall
Successor to SiliconBeat, founded by a former San Jose News journalist - VentureBlog by David Hornik, Andrew Anker, Kevin Laws (Emeritus), Naval Ravikant (Emeritus), Martin Tobias (Emeritus)
Discusses VC especially on early stage software, infrastructure and Internet related companies - VentureInside by Kara Nortman
Former VC with Battery, now at IAC - WayTooEarly by Howard Morgan
Director of Idealab, and Director of First Round Capital - Who Has Time For This? by David Cowan
Venture Vapital investor at Bessemer Venture Partners - Why VC? by Leland Cheung
Associate at Masthead Venture Partners in Boston, MA - Will Price by Will Price
Partner of Hummer Winblad Venture - Yoick – Hightechwire by Randal Leeb-du Toit
Venture investor and Director of National ICT Australia - Ventureblogalist by Rob Finn
Business Development Associate in a later stage venture firm.
My immigration proposal, revisited.
Back in April of 2006 I spent a few minutes documenting my proposal for immigration reform. Congress is considering an old proposal called the Dream Act (formerly the Student Adjustment Act of 2003) so I thought I would restate my earlier proposal:
Everyone has been weighing in on the immigration debate so I thought I would make my proposed solution public. The concept behind my solution is to recognize that workers from Latin America are here to stay. My plan allows anyone from Latin America to work and live freely in the United States under the following conditions:
- They register as a non-citizen worker before entry.
- They must pass a criminal background check before entry.
- They receive a non-citizen passport issued by the U.S. before entry.
- They must obtain a U.S. based bank account.
- They must obtain a U.S. drivers license in order to drive in the U.S.
- They must not vote in Federal, State or local elections.
- They must not apply for or receive welfare.
- Their children may attend public schools.
- They may use public healthcare facilities as long as they pay the medical bills within one year.
- They must not commit any crime.
- They do not have to pay taxes on the first $35,000 of income per family per year (no SS or Unemployment).
- They must return to their home country if they are unemployed for more than six months (stay at home mothers/fathers exempt if spouse is working).
Workers are only half of the solution. The other half will be employers:
- Employers must conduct instant checks on each newly hired non-citizen and recheck those non-citizens each quarter.
- Employers must report non-citizen employment, and income.
- Employers do not need to withhold any taxes.
- Employers do not need to provide health insurance.
- Employers must not pay more than $35,000 per year to non-citizen employees.
The penalties:
- Make it a felony (mandatory jail time) for employing a non-registered worker.
- Make it a felony for working in the US without registering.
- Expel workers who commit crimes, do not pay medical bills, or remain unemployed.
The carrot:
- Allow non-citizen workers who have lived and worked in the US for more than five years, have a clean record and have paid their bills to move to the head of the line for citizenship (they will, of course, lose their tax free status).
Let me know if I missed anything. We can make this work. Too bad our elected officials will never be able to get anything done…
Best Business Prep for High School Students
October 23, 2007
For me it was policy debate. I got to travel around the country, meet smart people and argue with them. The summer after my junior year of high school I went to the University of Vermont to study debate under Alfred “Tuna” Snider. I could have gone to Baylor or another school to study in their programs, but if you are looking for unique, off-the-wall and winning strategies Tuna is your man - he wrote the book on debate. And he has a blog - the Global Debate Blog! Oh, and the gyros at UVM are great!
Why policy debate? Each year you spent the summer writing a ‘business plan’ to support your point - by the first debate tournament your plan was ‘perfect’. Then team after team would tear your plan apart. Win or lose you would spend the next week reworking your plan, changing it up, fixing it, making it more perfect. The next week your opponents (some new, some old) would find new weaknesses in your plan. This would go on week after week all year long. Wow! Where else can you get this sort of practice dealing with this sort of intellectual pressure?
You have to be creative, you must think on your feet - did I mention that the AVERAGE speed for delivery on the national circuit is 6-8 words per second (350-400 words per minute). Don’t believe me? Check it out here , here and here. Not only do you have to hear and comprend a person talking ‘crazy fast’ you need to take notes ~ something we called “flowing” ~ we would create flows for each point or argument made by each team.
Did I mention that each judge might have a different paradigm (or combination of paradigms) for deciding the burdens of each team? Not only do you have to know your case and that of your opponent, you have to understand your judge. Some judges would walk into a round and indicate they judged based on one or more of these common paradigms: stock issues, policymaker, tabula rasa, games player, or speaking skills. No problem? Well what if you have three judges or five with different paradigms? It happened ALL of the time! It is just like real life - it is just like business - it is just like raising money. I owe a bunch to debate and great coaches like Tuna!
Full Ratchet Anti-Dilution Protection
October 21, 2007
Reposted from one year ago: The word “dilution” has several meanings in deal making; it is critical to understand the context. An investor in any given round of financing is concerned that the next round could be at a lower price per share than what he is paying this round. Therefore, the investor will insist upon anti-dilution protection.
If pressed for justification, the investor may explain that if the value of a company declines between rounds, management must be largely responsible. The investor maintains that he shouldn’t be penalized for management’s deficiencies. There are two common types of anti-dilution protection: full ratchet and weighted average. This post will examine full ratchet anti-dilution protection.
Full Ratchet Anti-Dilution Protection
As a practical matter [as compared to the legal language below], full ratchet anti-dilution protection gives the original investor rights to that number of shares of common stock as if he paid the current round’s lower price. I’ve tried to keep unnecessary complexity out of these articles, but it’s unavoidable at juncture.
Investors purchase preferred stock that is convertible into common stock. Initially the conversion is on a one-to-one basis, or at the same share price as that paid for the preferred stock. Anti-dilution protection is implemented by adjusting the conversion price.
The language that is used in a term sheet to say this is:
In the event that the Company issues additional securities in the future at a purchase price less than the current Series A Preferred conversion price, such conversion price shall be adjusted in accordance with the following formula: Full-ratchet – the conversion price will be reduced to the price at which the new shares are issued.
Let’s look at how this works.
The First Round
Let’s review my previous example.
- I offer to invest $400,000 in your company in exchange for 40% of it.
- Since you own all 600,000 shares of your company, I am offering to buy 400,000 new shares in order to acquire 40%.
- My investment of $400,000 divided by 400,000 shares that I’m buying yields a per share price of $1.00.
- Since you own 600,000 shares, that means the value of the stake in your company is $600,000, which is the pre-financing value.
- Adding my $400,000 to that yields a post-financing value of $1,000,000.
- That is confirmed by taking the total number of outstanding shares, 1,000,000 (your 600,000 and my 400,000) and multiplying that by the share price of $1.00.
- That also says that the post-financing value of your company is $1,000,000.
There’s one big difference this week. The terms of this deal include full ratchet anti-dilution protection.
The Second Round
It’s time to raise some more money. Unfortunately, the only investment offer you are able to attract is at a lower price per share than the prior round.
Without anti-dilution protection, the deal would proceed:
- The new investor offers to invest $500,000 for 50% of your company.
- If 50% of the company is worth $500,000, then the total company must be worth $1,000,000.
- Since there are 1,000,000 shares outstanding today and they will represent 50% of the company after the financing, then the new investor is buying 1,000,000 shares.
- The $500,000 investment divided by 1,000,000 shares yields a share price of $0.50.
- Since I paid $1.00 per share, I’m not happy. In fact, the 400,000 shares that I paid $400,000 for are now worth $200,000 (400,000 shares X $0.50 per share).
- The value of my investment has been diluted.
- In addition, the percent of the company I own has decreased (been diluted) from 40% to 20%.
- By the same reasoning, your equity stake is now only worth $300,000, and you’ve only got $500,000 of investor’s money to keep your business alive.
BUT I do have anti-dilution protection, so the deal will have needs to be adjusted.
The Adjustment – Step #1
With anti-dilution protection, the deal would proceed:
- The new investor offers to invest $500,000 for 50% of your company.
- If 50% of the company is worth $500,000, then the total company must be worth $1,000,000.
- Since there are 1,000,000 shares outstanding today and they will represent 50% of the company after the financing, then the new investor is buying 1,000,000 shares.
- The $500,000 investment divided by 1,000,000 shares yields a share price of $0.50.
- While I paid $1.00 per share, the new round will reduce that price to $0.50. So, in addition to the original 400,000 shares for which I paid $400,000, I will receive an additional 400,000 shares, bringing my total shares to 800,000 ($400,000 divided by $0.50 per share).
Done? Nope.
By issuing an additional 400,000 shares, the total number of shares has increased as well. The new investor would only own 42% if we were to stop here, but we won’t.
The Adjustment – Step #2
Remember the first element of the deal:
- The new investor offers to invest $500,000 for 50% of your company.
- If 50% of the company is worth $500,000, then the total company must be worth $1,000,000.
- Since there are 1,400,000 shares outstanding, including those created by my anti-dilution protection, the new investor must buy 1,400,000 shares to purchase 50%.
- The $500,000 investment divided by 1,400,000 shares yields a share price of $0.36.
Done? Nope.
The Adjustment – Step #3
With the share price having dropped to $0.36, my anti-dilution protection needs to be recalculated
- Since the price per share this round is $0.36, in addition to the original 400,000 shares for which I paid $400,000, I will receive an additional 720,000 shares, bringing my total shares to 1,120,000 ($400,000 divided by $0.36 per share).
Done? Nope. Beginning to see a pattern?
The Adjustment – Steps #4-?
When I get additional shares from anti-dilution protection, the investor’s ownership drops to less than 50%.
The share price is reduced so that the investor is buying enough shares to own 50%.
The lower price means I get more shares. That lowers the investor’s share price. And on and on…
This why I learned to use the “Iterate” function in my spreadsheet.
The Investor Outcome
The share price drops all the way to less than $0.17.
The new investor buys 3,000,012 shares.
I get 2,000,010 shares as a result of full ratchet anti-dilution protection.
Your Outcome
As you may have noticed, all of these adjustments have occurred to the investors’ positions. What happens to you?
It isn’t pretty. As the number of shares for the investors ratchet higher and higher, your number of shares remains constant at 600,000.
Your share of your company has fallen to 10%!
The value of your shares has dropped to $100,000!
Reviewing the Basics
Let’s look at some of the relevant basics.
- Deals are negotiated with percentages, but are structured with shares.
- The value of a company is determined by multiplying the total number of common shares by the most recent share price.
- Price per share = Amount of investment divided by the number of shares purchased.
Recap
An investor in any given round of financing is concerned that the next round could be at a lower price per share than what he is paying this round. Therefore, the investor will insist upon anti-dilution protection. Full ratchet anti-dilution protection is very friendly to the investor and is very harsh to the founder.
Advice is free!
October 20, 2007
Last year a friend of ours brought a young entrepreneur by the office to pitch his idea. We listened for a bit, but soon began offering our ‘advice’. We assumed ‘advice’ was what they were looking for since we have been very public in our decision to stop funding outside deals. I suggested that the entrepreneur lose the Powerpoint and replace it with a simple prop. I also suggested some minor languaging changes - e.g. drop statements like “no one else can do this”. Finally, we recommended that he talk to a couple of local entrepeneurs with experience in the space.
His idea is very cool ~ not sure if it will work, but if it does I suspect he will do very well. When he explained how little money he needed to build his technology I quipped that we might as well fund/build it. The conversation became more serious and then I explained the advantages and disadvantages of working with us. Advantage? No more fund raising, we just execute and move forward now. Disadvantage? We take control. We become ‘partners’ owning atleast 51% of the deal. Nightmare!
What would I do? Easy, raise venture capital. I explained that if I were in his shoes I would pack my bags and move to the Bay Area, get involved in the tech community, find a partner with experience building a startup and raise money from the best venture capital firm I could find. Dallas might be a better location for talent (telecom hardware), but with the turmoil in the local VC market (Sevin Rosen shuttering their latest fund) it might be easier to fund a deal in the Valley (oh and it is easier to build a Googley Workforce there). Too bad because this deal would be right up their alley ~ Jackie Kimzey might be the perfect guy to lead the startup on an interim basis.
Did you know? Most VC deals are done OUTSIDE of Silicon Valley?
October 19, 2007
Has anyone ever heard of the internet? I hear it is changing things, making location not as important. Fred Wilson commented on a meme that Paul Graham started titled, “Houston can kill your startup!“ Fred’s point? More than two thirds of all venture capital dollars are spent on non-Silicon Valley startups. Randall Stross with the New York Times suggested that more than half of all Web 2.0 deals were outside of the bay area. Fred points out of the three biggest deals done during the past three years, Skype, MySpace and YouTube, only one of them was from the Valley.
I love the bay area and to a lesser extent Silicon Valley, but I realize that entrepreneurship is going global. The internet, in all of its Web 2.0 glory, is removing the geographic barriers that have held back entrepreneurs, from places like Houston, for years. There was a time when smug programmers sitting on Market Street could be sure they were on the bleeding edge of whatever they were working on. Today they better look over their shoulders because there are thousands of smart, talented and connected people all over the world - from Bangalore to Beijing to Baltimore. Its the internet stupid ~ get on, or get run over…
Don’t skip the start, there is a plan B.
Pascal said that things are always best at the beginning. I suspect he was referring to math problems, but I think it works for startups. Raising venture capital at the VERY start is like skipping high school and going directly to college. You get done quicker, but miss some of the most important learning.
Okay, so you drank the koolaid and raised capital from the best VC in town, but realized very quickly that you made a mistake. Which would you choose? Plan A: just keep trying to make it work (i.e. the never give up plan) or Plan B: buyout your VC and start building something great (i.e. the I am done with you guys plan).
If you are Ev Williams, the founder and CEO of Odeo (according to Valleywag), you choose Plan B. Ev bought back the shares his investors (Charles River Ventures) bought when they funded Odeo. It helps that he sold his previous startup to Google (Blogger). Ev figured out that Odeo wasn’t figured out when iTunes launched their podcast directory in November 2005. He was in a pickle, but he was stuck with his venerable VC partner (for almost a year!). He didn’t take his own advice in a blog post he titled, “Ten Rules for Web Startups”. I wrote about it in a post titled “Be Narrow, Be Tiny”: Don’t Raise Money!!” ~ at least at the start…
Ev announced that his new company, Obvious Corp., acquired the assets of Odeo and Twitter. Ev explains,
Obvious has purchased all the assets of Odeo, Inc.—including odeo.com and twitter.com from the investors and other shareholders and will continue to run these services. Obvious is fully funded by me and, eventually, will create other things, as well.
Ev then sold the Odeo assets for a reported $1MM and has shifted the companies focus exclusively to Twitter. Very cool story…
The New England Cheaters? Fans and Team Caught Red Handed!
The New England Patriots spent the last year in court suing eBay to find the names of 13,000 of their fans who violated the rules, i.e. ‘cheated’ by selling their tickets online. During that same period of time NFL Commissoner Roger Goodell determined that the team violated league rules, i.e. ‘cheated’ when the team used electronic devices to steal the defensive signals of at least one opponent. Pundits speculate that the Patriots, who won three Super Bowls by an average of just 3 points, may have been cheating for years.
The Massachusetts ballclub sued eBay (StubHub) last year and today today the company was forced to turn over the names of 13,000 people who bought or sold the team’s tickets. The Patriots plan to cancel season tickets of customers who used eBay to sell their tickets. They also plan to refer the names to State officials for possible criminal prosecution. What was the Patriots penalty for cheating? A relatively small fine for the team and the coach.
Anyone else bothered by the hypocrisy? The State is changing the scapling laws to allow for the resale of tickets, but teams will still be allowed to prohibit the resale of their tickets. I think the Patriots should rethink their policy and allow fans to buy and sell tickets to and from anyone they wish. At the very least they should give their fans a free pass on this one in light of their own transgressions.
