Altgate

R.I.P. Evel Knievel

Growing up, I idolized Evel.  He had no fear, or at least appeared to have none, but in reality he worked hard behind the scenes to make the impossible look like magic.  He had grand ambitions.  And he was a master at marketing. In other words, he was a great entrepreneur.  RIP.

Stock Plan Administration Software

In the process of researching equity compensation for startups, I came across a product called Equity Focus from Two Step Software.  I spoke with the good folks over at Two Step, watched a demo and was very impressed.

The solution is delivered as a service like Salesforce.com and provides an easy to use yet very sophisticated tool to create and manage your company's capitalization table.  It allows you to create a comprehensive archive of all the events and related documents that influence your cap table and it provides an audit trail.  The reporting looks very powerful and the prebuilt work flow and forms are comprehensive and flexible enough for most startups.  And to boot, it is priced very reasonable--cheap enough, in fact, that every startup should use this tool or one like it from inception.

One of my favorite features is the export to Excel feature which isn't unique by itself but the fact that it exports formulas instead of just numbers allows users to easily do "what-if" calculations, for example, to compare two term sheets.

You can also give investors and others read only access to certain things (like the cap table report). 

In the past I have used shrink wrapped, desktop software to manage options as well as just Excel files and shared directories.  I think Equity Focus is superior to both.

Warm Calling

Brad Feld posted about a company that sent him a video elevator pitch which he put on this blog.  It's very well done.  There is also a site Vator.TV which helps manage video pitches ("Vator" is short for "Elevator").  This is a great way to turn a cold call into a warm one.  It is not intrusive, it is asynchronous and the fact that it is multi-media makes it so much richer than a phone call or an email.

I also like the fact that it has a built in "delivery receipt notification" as well as tracks to whom the note was forwarded and when it was watched.

Every company pitching for VC money should put together a video elevator pitch.

More On Startup Equity Compensation

Whoa!  That was pretty cool.  I got a bunch of tips from folks which I'll filter through and compile into a "best of" list of resources on the topic.  So far though, what I've found is either (1) detailed data on top executives like Noam Wasserman's annual study or (2) rules of thumb for everyone else.  What I'd really like to find is hard data on "everyone else."  In fact, I just had lunch w/ Noam Wasserman and chatted with him about this.  He gave me a source to check out and I've found a couple of other potentials but it will have to wait until after the holidays...

Happy T-Day!

More On Compensation Data

A few years ago I searched for data on equity compensation for startup employees beyond the VP and C-level and found nothing useful.  I did find a number of sources that included "number of options" by different job titles, but without knowing the percentage of fully diluted shares outstanding, that data is not useful.  Recently I've done some more research on this topic and hope to be able to find some better data.  If you know of any good resources on this topic, please contact me by email or post a comment.

Refreshing The Option Pool

In the vast majority of venture financings, the size of the option pool reserved for employees is increased just prior to (and in conjunction with) the closing.  The argument entrepreneurs will hear from their prospective investors is that the new investor, "doesn't want to be diluted by employees hired right after they invest" which makes about as much sense as saying, "I don't want any of the proceeds of this financing go toward paying future salaries of employees."  Despite that, it is customary that the option pool is increased and you should really think of it as part of the "price" negotiation.  What you can do is to preempt the conversation by putting together an "equity budget" that shows that the pool plus a particular refresh you suggest provides enough equity for the hiring plan for at least the next 18 months.

In putting together the budget, a rough estimate that you'll want to tweak based on the particulars of your company is 1-2% for CXO's and VPs, 0.5% for Directors, 0.25% for managers/developers and 0.1% or less for others.  You will also want to look at existing key employees and assess if any additional refreshes are necessary.  If you want to get more specific data on what is the "right" number, an excellent source is the annual startup compensation study done by Prof. Noam Wasserman at HBS.

You'll want to take the data for your hiring plan from your financial model and use the equity budget for each position to create the pool refresh.  For Series A/B deals, the typically the total pool will be 15-20% after the financing (excluding the founder(s)) and usually about half of that will be ungranted and reserved for new hires.

Avoid Pitching Over The Phone

Pitching a potential VC investor is hard enough and doing it well over the phone is next to impossible.  You can't see the body language on the other side of the phone, demos are more difficult, it's less interactive and it's inefficient for both parties.

You can't always avoid it, but do if you can.

How To Test If Your Idea Is A Company

Once you have an idea and want to see if it can be a business one of the first things you want to do is get as much customer feedback as possible to help you determine things like the problem you want to solve, how big it is, who has the problem, what is your solution, how much you charge, etc.  Getting this information is critical to your success, but unfortunately, this is often the time when the "company" has the least money and fewest resources (in fact it might not even be a company yet).  So, how do you get customer feedback?  Well, interviews is one way, but are best if combined with surveys.  There are great tools like Zoomerang which help collect and analyze survey data but probably the biggest challenge is getting enough of the right people to answer your questions.  Here are a couple of tricks on how to get many (and meaningful) responses:

1. Get someone (or several people) to send the survey invite out who individually or through their corporate affiliation has the credibility to warrant a higher response rate than you might get personally.
2. Do what JD Edwards does with the survey they send to every new car buyer (include a crisp new dollar bill). You can attach $1 to an email using Paypal if you're doing the survey electronically. If you give something outright to them, you create a perception that they "owe you a response" and presumably it works for JD Edwards (and that guy who holds the door open for me every time I go into 7-11).
3. Join LinkedIN's premium service so you can send InMails directly to targeted people asking for their expertise. There are a lot of people on LinkedIN and you should be able to find some who fit the profile of your target customer.
4. Find the blogs of ideal survey respondents and send them a message through their blog. Most people are personally attached to their blogs and will take the effort to respond to people who they know are reading their blog.
5. Follow up your email invitation 24 hours later with a phone call. If you take the time to call and can get them on the phone for a brief conversation explaining why you are so interested in their opinion, you will get a higher response rate.
6. For almost every industry however big or small, there is usually one or more trade groups. Reach out to the organizers of the trade group(s) and ask for their help in getting survey respondents. Ask them to fill out the survey.
7. Start your own blog and use it as a tool to write on topics of interest for the market you seek to serve. Post your survey on the blog and post summary data that others will find useful.
8. Promise to share results of the survey with survey respondents.
9. Ask respondents to refer one or two other people who they know that would be good participants in the survey.
10. Offer to donate an hour of your time to each respondent to some nonprofit you select. Or maybe select two or three and let them choose which one they prefer at the end of the survey.

All of these tricks utilize more time than money which for most startups is more available. 

Reverse Due Diligence

Many first time CEOs mistakenly think that due diligence (in conjunction with closing a round of venture capital) is a one-way street.  It is definitely not.  And if you, as CEO, are in the enviable position of having multiple term sheets, then doing some diligence can be the swing factor in deciding which investor(s) to invite into your board room.  With that in mind, here are a few tips on how to conduct what I call reverse due diligence:

• Find out who you need to check out.  If it is not clear to you already, you should ask who would be the partner on your board.  While general feedback about a fund might have some value in terms of assessing an overall reputation, the most useful information is specific to the person you will have on your board.
• Find out what boards they've been on.  Most likely you'll be able to get a list from the fund's website and a little Googling.  It's also worth asking the VC what boards they have been on.
• Ask for founder references.  You should ask for references and be specific that you would like to speak with founders (not CEOs who replaced the founder post funding).  I'd also ask directly, "what were the 2 or 3 worst deals you have invested in?" and then ask if they mind if you spoke to the founders of those firms.  If during this process you get a "no" or radio silence then you should be wary.  It might be fun to talk to a founder who had a hugely successful 20x return for the fund, but you will definitely learn more from speaking with someone who went through trench warfare.  As they say, crisis doesn't build character, it reveals it.
• Look for blind references.  Check out TheFunded.  If you're not a member already, it's pretty straight forward to join (I also have a few invites available and am happy to share on a first-come-first-served basis).  There are thousands of reviews on there, although it is still hit or miss on whether the fund you are interested in has been reviewed.  You can, however, post a "call for feedback" on the public forum which I suspect would get some useful feedback.  You should also go on LinkedIN and search for current or past management at companies on which the VC sits or used to sit.
• Questions to ask references.  So now you should have a list of 10 or so direct and blind references...it's time to make some calls.  In general, you want to ask short, open ended questions and then shut up and listen.  Each call is different, but here are a couple of questions you might consider:
  
  
  • How did XYZ prepare for board meetings?
  • How did XYZ contribute in board meetings?
  • What was XYZ's biggest contribution to the company?
  • When it came time to raise another round, how supportive was XYZ?
  • When you missed your numbers (or had a major problem), how did XYZ react?
  • How did XYZ respond to compensation requests you made (for you personally as well as for your team)?
  • When you sold/shut down the company, how did XYZ behave?
  • Any tips on how XYZ likes to receive their board package?

Also, if the references are local, you should invite them out for coffee or a drink as you're more likely to get candid feedback.

• Get up close and personal.  After you have had a chance to make a few of these calls/meetings, go out to dinner with your prospective VC and ask them for "their side of the story."  This is a great time to have "what if" conversations with them.  For example, this is a great time to ask, "when do you expect to have the first serious review of my performance as CEO and whether or not I should continue in that role?" 

Most likely you will find that one of your potential investors will distinguish themselves during this diligence process.  Worst case, if everyone comes through with equally positive references, you will have some good information on how to work with your new board member.

My "Demo" Are Fans of Firefox?

I've noticed for several months now that the majority of people who view this blog are using Firefox (some 64% yesterday).  It varies daily...sometimes it's 30% sometimes 70%, but almost always it is more than IE.  Now admittedly the number of users who visit this blog are small in the global scheme of things, but what I find curious is that they appear to be big fans of Firefox (which apparently has a sub-10% market share).  Anyone have an explanation?