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Random Tips

Most of the posts on this blog have been about fund raising, so these tips are a bit off topic. Nonetheless, I wish someone had shared these with me so here goes:

1. How to test browser compatibility. Anyone who's developed a website knows that it is a pain in the butt to make sure the site plays well with various browsers.  There is a great tool at Browsershots that rocks.  You just type in the URL of the page you want to test and then select as many as 50 browser/OS combinations (that includes multiple versions of the same browser) and in a few minutes you get a screen shot of the page as well as a file you can download.  And it's free to boot.
   
   

   

2. How to do screenshots the easy way. I hate the fact that sending someone a screenshot requires that I first capture the page and then open another program, paste the shot and send an email.  Well, if you have Windows Vista, there's a crazy cool utility called "Snipping Tool" which allows you to grab the whole page, a rectangle or a random shape and then to copy it directly to a file.  To launch this program, click the Windows button and search for "Snipping Tool."
   
   

   

3. How to register many accounts with one email address.  A lot of sites (like the one I'm developing!) require an email address for each user account and that email can only be used once.  So if you're testing the site and want to have several users, how do you avoid creating a lot of email accounts?  Well, Gmail makes it easy.  Every Gmail account allows infinite aliases of the form: [email address]+[alias]@gmail.com.  All of these messages go to your existing Gmail account and most sites consider them an unique address.  For example, my Gmail account is fnazeeri@gmail.com and an alias that also goes to that account is fnazeeri+test100@gmail.com.   

Why Dividends Matter

Somehow when you see that little clause on the term sheet about an 8% dividend for the preferred shares, it doesn't seem that big of a deal at the time.  But to put it in perspective, let's take a typical "success" story and see how that dividend affects the deal.

Imagine a scenario where a startup raises $14.5MM in 4 rounds (seed plus A, B and C) and that each round has the 8% compounding dividend paid on exit.  Further, let's imagine the company sells for $75MM.  Here's the cash flow:

Date	Cashflow
Year 1	-500
Year 2	-2000
Year 3	-5000
Year 4	-7000
Year 5	0
Year 6	0
Year 7	75000

In this scenario, the dividend results in an extra $4.9MM paid to the preferred shares which is about 6% of the sale economics.  So the way to think about this little term is whether you want to give a 6% vig to your investor.

How Liquidation Preferences Work

Liquidation preferences are a key term in the definition of preferred stock (it's generally acknowledged to be the second most important economic term).  Earlier, I wrote about this and other terms in a post on negotiating a term sheet, but here I want to give some specific examples to illustrate why this is such an important term.

You probably already know this, but it's worth repeating that liquidation preference refers to the procedure for paying investors off in a sale or winding up of the company.  It typically includes two components: a preference (which is an amount that gets paid before others) and participation (the ability to "double dip").  Many folks have written on preferences in terms of definitions, so instead I'm going to give some simple examples.

For simplicity sake, imagine a VC has $10MM invested in one class of preferred stock in a company, owns 40% and the company is sold for $50MM. Here’s how the three different scenarios in my previous post work (in a specific example):

(1) 1x preference w/ no participation. In this case, the VC has the choice to take $10MM (their 1x preference) or to convert to common and take $20MM (40% of the $50MM). Obviously, they’d want to do the latter. You might ask, what’s the value of the preference? Well, imagine if the company were sold for $15MM—in that case the VC would take the $10MM preference which would mean they really own 75% of the economics (not the 40% shown on the cap table).

(2) 1x preference capped at 2x with participation. In that case, the VC would get $10MM off the top (1x preference) and then get 40% of the rest (or $16MM) but here the cap kicks in so instead of getting the extra $16MM, the VC would get only an additional $10MM for a total of $20MM (or 2x).  It's helpful to look at a table of outcomes here:

Sale	As Preferred	As Common
10	10	4
20	14	8
30	18	12
35	20	14
40	20	16
50	20	20
60	20	24
70	20	28
80	20	32
90	20	36
100	20	40

The first column is the sale price, the second is the the value to the VC "as preferred" and the right column is the value to the VC if they convert to common (which they always have an option to do).  You'll see how the cap creates a "donut hole" where the VC receives the same amount whether the company is sold for $35MM or $50MM (because the VC would convert to common in any sale over $50MM). 

(3) 1x preference with participation and no cap. In this case, the VC gets $10MM off the top, then they convert to common and get 40% of the rest (or $16MM) for a total of $26MM. In this case, the VC gets 52% as opposed to the 40% shown on the cap table. You can see with this simple example how the liquidation preference can add substantial returns for investors (which all comes out of the pocket of common).

So my view is that, no participation is the best option for common, followed by a cap and the worst deal is the no cap participation scenario. 

Lastly, I would like to give a caveat on the cap scenario which is that the donut hole sometimes creates an unwelcome incentive. Imagine in the above example if there were two deals on the table: one for $35MM in cash and another for $35MM in cash plus a $15MM earn out. Further, imagine that the $35MM all cash deal is slightly more likely to close.  In that scenario, the VC would be inclined to take the lower priced deal (remember they get paid the same in both scenario) but common would probably go for the higher deal. 

Go Green @ Work

After several months in the oven, I am thrilled to announce the launch of my new venture, Viridus, a community for business professionals to discuss and advance corporate sustainability. 

Viridus is a practical "how to manual" for issues everyone faces at work.  Our belief is that everyone has a "green collar" job and it is how you do your job that actually makes it green or not.  An accounting department working on reducing paper billing, an engineering group designing for recyclability, a purchasing department seeking to reduce the ghg footprint of their supply chain, a facilities department looking to reduce energy or water consumption and especially those who work in corporate sustainability will all find value at Viridus.

Viridus is a members-only site with 100% user-generated-content.  We feel that an environment of business professionals who have responsibility for the sustainability of their organization is particularly valuable.  This way members don't have to worry about being solicited by vendors, press, regulators, NGOs, etc.

We are strongly committed to improving the sustainability of businesses everywhere and look forward to building the Viridus community.  We are currently in invite only private beta.  If you would like to request an invite, please sign up here.  In the meantime, please feel free to send us feedback, comments or questions.

And lastly, over the next few weeks I'll be posting more on my transition from EIR back to entrepreneur, so stay tuned!

Entrepreneur

Canadian inventor Ben Gulak is apparently behind this Segue-inspired motorcycle called the Uno (there are actually two wheels, they're just side by side).  As an entrepreneur, many people tell you your idea is crazy (and all but the most dedicated give up in the face of such criticism).  I can only imagine the feedback Ben got!  Best of luck Ben.