“You’ve either started a company or you haven’t. ‘Started’ doesn’t mean joining as an early employee, or investing or advising or helping out. ”
As someone who has founded companies with no more than an idea and some elbow grease, it is nice to see I am not an arrogant jerk for pointing this out — or at least I am not alone.
When it comes to the “worth” of advisors and investors in early-stage companies, I would suggest that the experience of being a true founder is invaluable. The ability to share that special experience with clients in my legal practice has saved the day more than once. And at our new Dauntless Founders Fund, we like to highlight that most of our managers have gone from start-up through to exit.
If you are running an early-stage company, which investors/partners do you want in your corner: true risk-taking founders who have done it, or joiners and money people? While those who join in or pile on can (and do) add a lot of value for execution of a company’s growth phase, if you are at the “idea level” or just beyond I would suggest you seek the guidance of real start-up folks every time.
A number of people responded to the aforementioned Chris Dixon post (set forth in full below) by complaining that not all founders are ramen-eating, cubicle-borrowing, recent grads with credit-card (or trust fund) habits. That is 100% true, including with respect to yours truly. Yes, some of us are more mature, have had a career first, and have hard-earned dollars in the bank from prior, more traditional, efforts (whether just a bit of money or a substantial sum). In fact, I would also agree that many folks who have had a job or two and leaving a career path (and with family responsibilities) actually take much more risk when they leave it all to start a company. After all, as Bob Dylan said, “When you got nothing, you got nothing to lose” — and recent grads with an idea aren’t exactly “throwing it all away” if they try and fail for a year after graduation. In fact, they may simply be doing an extended job interview for a slot at Google. Working for 5 months for an “acq-hire” is not really entrepreneurship, folks.
On the other hand, I think the “haters” are over-reacting. Do they really think that by writing about one type of company founder (young, single and living on the edge) Chris meant to denigrate other true entrepreneurs? I doubt it, and I am sure Chris and others recognize a true founder and entrepreneur when they see one. Be confident. If you are a true founder, people will know it. Just tell them how you started your company from scratch.
Here are two touchstones I would suggest cover this issue —
A true founder/entrepreneur:
- puts his or her own financial reputation and assets at risk, and
- generally engages others in his/her enterprise very early on in order to grow faster.
Even the ramen-loving recent grad is putting capital at risk with those credit cards or $$$ from friends and family. And it is a rare person who really is an entrepreneur/founder of anything significant who did not quickly have to find partners or employees to make the project go.
So, if you are a founder, why does it matter whether or not someone advising or investing in you is a true risk-taking founder? Simply put, someone who starts a company has a different and passionate road to travel, and the experience garnered is seared into their being. I believe that only another founder can truly understand this, and I think that when it comes to early-stage companies true founders (who risk their own capital and employ others at the earliest stages) can give better advice (and are generally better investors) than “joiners” or “advisors” of true founders. So, if someone was employee number 7 or an early advisor at XYZ successful company, that is very, very cool, and that person may be very, very smart. But unless he or she guaranteed the lease and put in capital, that person did not start the company and is not a founder (or, the more frequently claimed “co-founder”).
Of course, many viewpoints and experiences are valuable in their own ways and areas, and there are a lot of roles to play. And sometimes money is all one is seeking from an “advisor.” But if you actually want great start-up advice from someone who “gets it” and will best understand what you are feeling and doing, you will want to have experienced, risk-taking founders/entrepreneurs to guide you and invest their time and money in you.
After all, there really are only two kinds of people in the world…
Chris Dixon says:
You’ve either started a company or you haven’t. ”Started” doesn’t mean joining as an early employee, or investing or advising or helping out. It means starting with no money, no help, no one who believes in you (except perhaps your closest friends and family), and building an organization from a borrowed cubicle with credit card debt and nowhere to sleep except the office. It almost invariably means being dismissed by arrogant investors who show up a half hour late, totally unprepared and then instead of saying “no” give you non-committal rejections like “we invest at later stage companies.” It means looking prospective employees in the eyes and convincing them to leave safe jobs, quit everything and throw their lot in with you. It means having pundits in the press and blogs who’ve never built anything criticize you and armchair quarterback your every mistake. It means lying awake at night worrying about running out of cash and having a constant knot in your stomach during the day fearing you’ll disappoint the few people who believed in you and validate your smug doubters.
I don’t care if you succeed or fail, if you are Bill Gates or an unknown entrepreneur who gave everything to make it work but didn’t manage to pull through. The important distinction is whether you risked everything, put your life on the line, made commitments to investors, employees, customers and friends, and tried – against all the forces in the world that try to keep new ideas down – to make something new.
When the sale of a business is contemplated, the Seller and other potential clients frequently worry about legal fees gobbling up the value of a deal, but it is a rare client that understands that the client has more control over a lawyer’s bill than any other participant in the deal.
Here is why that is true:
The nature of the deal structure and of the Seller and the Buyer is (very roughly) 70% of the determinant of what the fees will be. How high/low a Seller’s legal fees really will be requires a unique analysis of the specific requirements of each deal. So, I am not going to give numbers here. But I assure you that the fees can run VERY high depending on the amount of effort that is required of the lawyers. In other words, the lawyers don’t set the fees — just their hourly rates. Time spent on your project x hourly rates = price. Estimates are nice, but in the end it is about time required x hourly rate. You can ask for a discount on the hourly rate if you have a lot of work to guarantee the lawyer, and if you are guaranteeing a really big fee you might even get a cap on the fees. But this is rare (and should be).
Bad news for small companies asking this question: Your size will not necessarily lessen the amount of work that has to be done in order to represent you in a sale, and the legal fees will be higher as a percentage of the total value of the deal, just like the i- banker’s fees (if any). So, a selling company 10x your size may have a legal bill in connection with its sale that is only 30% larger….
A good lawyer will work with you up front to identify ways you can keep the lawyers’ workload (and therefore the lawyers’ bills) down. I would insist on that sort of a meeting instead of just trying to find the cheapest lawyer (or the one that will tell you what you want to hear at estimate time).
Below are some of the variables that will result in higher legal fees for Sellers:
A. an asset sale where there are a lot of contracts that need to be reviewed, especially for their assignability in the deal;
B. a stock deal where there are poor records relating to stock issuance, options, warrants and the like;
C. if Seller’s counsel must issue a legal opinion, and the number of tough issues on which the counsel is asked to opine (the work required to give an opinion can be a large percentage of the legal fees of counsel);
D. if the Seller or the Buyer is, or both the Buyer and the Seller are, public companies (this can be huge);
E. whether or not there is any debt financing being taken out by the deal;
F. whether or not there is any new financing (debt or equity) in connection with the deal;
G. how many rounds of negotiations, all-day drafting sessions and the like take place, and how contentious and protracted those negotiations are;
H. how much work the Seller does in terms of preparing the diligence documents that the Buyer wants to see, and how much ends up in the lap of Seller’s counsel because the Seller is either incapable of doing the work or unwilling to deal with the tedious grind (and also will not have a mid-level or administrative person on this paper production because they do not want the rank and file to know about the deal!); and
I. a host of other issues that will arise.
So, when you seek counsel for the sale of a business, find a reputable lawyer to guide you though the entire transaction, and consider the foregoing issues as you plan out your legal fees and strategy.
Mark Suster is at it again. In a good way overall, but, as usual, the good lawyers (and other professionals) have to defend themselves.
Mark’s latest re lawyers is that lawyers won’t do an all-hands meeting to be efficient and get the deal done.
I believe this to be false. I have often strongly urged (BEGGED) multiple times for all hands meetings and not been able to get them when acting as counsel for a client. In each case we were forced to “negotiate by drafting” and sending docs back and forth by email. And, in each case, the deal fees and the frustration on both sides went up and up. When the strongly and frequently urged all-hands meeting was severely delayed or never happened, I believe it was the PRINCIPALS, and not the lawyers, who were resisting the meeting, foolishly thinking it was a time-suck for them and a way lawyers try to get more fees or a free trip to their beautiful city! Sometimes cynicism bites you in the ass.
If you have trouble getting parties to agree to an all-hands drafting session, either (a) you have bad lawyers who are not putting client interests first, OR (b) you are misjudging the source of the problem. I suggest that 90% of the time it is the latter, and that 10% of the time you need more attentive lawyers.
In short, I agree 100% with the all-hands negotiating session approach (kudos to Mark for pointing this out), but the only issue I have seen from the lawyer side of this equation is a busy schedule.
So, if you have lawyers who have schedules and styles (or attitudes) that make it tough to get an all-hands meeting, FIRE THEM, and hire lawyers who care about results – your results. They do exist. You may even wish to engage a lawyer who is also an investor and entrepreneur?
Mark Suster’s post: Don’t Cede Control: Why You Need to Cut out Middle Men in Negotiations
So you got your big term sheet signed and you’re now in the drafting. You thought it was going to be as easy as just having term sheet transferred to a longer form document. But as it goes to the legal docs naturally 20 issues arise the require negotiations. You want the deal to close in 4 weeks. But every freakin’ week there are delays in getting the lawyers to “turn around” the documents.
Their lawyers blame yours. Your lawyers blame theirs. This seems to happen on every deal I ever work on.
Here’s the reality. Sometimes the problem is that one of the sets of lawyers has too many deals on the table and just doesn’t process your documents quickly enough. Trust me, that happens. Other times it’s a matter of the other lawyers waiting for feedback from their client who hasn’t had time to process the issues. So much freakin’ time gets lost in the back-and-forth.
And then there’s the madness. Lawyers insist on arguing with each other like sports. They have their “lawyer points” that they really care about and believe you should be passionate about as well. It’s their job. I call it “arguing over semi colons and periods (full stops to you Brits).”
Do you want to get the deal done faster? There’s one way – even though everybody is going to try and resist. Get everybody in the same room for a multi-hour “drafting session.” By everybody I mean your lawyers, theirs and the VCs or whoever the client is (maybe a company acquiring you). That’s the only way to work through all of the issues in a timely manner.
Why do they not want to commit to being together? I’m guessing it’s less efficient for them. They have to suck up all those hours for just one client and in a large block. If they do it asynchronously they can deal with it when they have time to get around to it – often late in the evening. If for some reason your deal fall through – remember that “Time is the Enemy of All Deals” – it’s not the end of the world to them. It might be to you. Your incentives for speed aren’t aligned.
In the same room, when “lawyerly” issues crop up you and the counter-party can take commercial judgments on where you want to compromise. In the same room, clients can’t “hide behind their lawyers” by saying “it wasn’t me asking for that.” You problem solve. Everybody is in the room to hear the issues.
Shit gets done.
Don’t let lawyers toss the ball back-and-forth. Cut out the middle man. Negotiate directly with your VC or acquirer with lawyers present in the room.
Here is an answer addressed directly to the asker who posed this question more passionately on Quora as “Why is raising money, deferring breakeven acceptable for an online startup, but if an offline business owner proposed this strategy for his traditional business, investors would consider him crazy or an idiot?”
I can understand the frustration of the asker. A rational investor/actor should in fact look at both scenarios the same way. What the asker may not realize is that, in fact, all these businesses are being looked at the same way.
If you are applying a new business model to a traditional business, and can show why this is a valuable way to get to more profitability later, you may get the attention of investors even though you are not profitable for a while.
Otherwise, with a “traditional” business applying the traditional business model for that business, there are known metrics, and, except for software and certain entertainment and other IP-based businesses, there is a cost of goods sold that, once scale is reached, stays relatively constant on a per-unit basis. With a “traditional” business, with a traditional (“known”) revenue stream and business model, deferring profit is just fine, if you can show how you get to (and how long it takes to get to) the “known” stream of revenues and income. If you do not show profits on your way to full scale, and only get there once you reach full scale, then you are showing a risky business and (again, unless you are a game or movie business or equivalent IP-based company, which is already plenty risky) a low margin business to boot. If you are not at profitability, the longer it takes to get there, the more capital must be invested in the enterprise, lowering ROI. And in many cases, the more you sell the more you spend/lose.
For the typical “online” business you are citing (assuming this is not referencing online retail or the equivalent, which has metrics closer to the “traditional” businesses it emulates and attempts to disrupt), the costs tend to be concentrated up front, and then you should have a massive margin expansion as you deliver your non-tangible product (i.e., cost of the delivery of additional copies/pages/software approaches zero). So, for this reason, with this business model, investors are willing to wait longer for profitability.
You probably also have your eye on companies with no known business model at their creation and subsequent funding. In the case of a Twitter or a YouTube, developing a big audience is/was an asset that (ultimately) feeds an advertising model. It may not work in the end if the cost of delivery exceeds the ad revenue generated by the userbase (YouTube), but at the rapidly expanding early stages I think the investors either thought otherwise or (as in the case of Google) purchased for strategic reasons other than profitability of the business itself.
I just answered this question on Quora – it caught my eye, and I could not resist.
Is becoming a signed music artist similar to raising venture capital?
Yes, in terms the sense of a need by the musician or entrepreneur for the $$$ and imprimatur of the record label/VC and how those entities often make flavor of the month decisions (I was a music manager at one point in my career and remember vividly the challenges and frustrations of getting my first major label artist noticed and ultimately signed. Amazingly, and quite coincidentally to seeing this question, I shared this very set of analogies with the VC-funding process just tonight with the CEO of one company seeking financing!
For many VC and record labels (though there are blessed exceptions, so please save your bile), there is a big similarity on the following levels:
A. both labels and VC are overly influenced by their peers (and, like kids playing soccer, investors and record label execs often move on “trends” and with the herd);
B. especially over the past 10 years, both labels and VC feel a need to identify a “hit” right away rather then find the hit after some more time, work, trial and error and discovery (with the demise of the album this accelerated; another example: the Beatles were rejected by almost every label because they sounded (at first) like a lot of other bands; many start-ups have to change business models in order to find the winner);
C. similar to item A, record labels and VC are into what is “hot” and not into what is not — and that is with respect to their INSULAR worlds. Ugly ducklings need not apply.
D. they tend to invest in/sign what THEY personally like, not what the average person will like. In the case of VC, their personal buying and technology experiences and habits identify what they will fund way too often, and they are much more likely to miss what someone who is not as tech-savvy or living in Silicon Valley will want. The really smart ones in both businesses avoid this issue — and we all make mistakes on this one, including Lee Weinberg.
E. Because of the demand for their time, both use associates/interns and then Vice Presidents and the like in order to filter; but the President of the label and the Partners of the VC make the ultimate decisions.
F. Related to E, both record labels and VC attend public events to source new opportunities and rely on lawyers and other “feeders” (and place value on them as filters).
G. Some VC have run companies, and some have not. Some label execs have recorded music and played instruments. Some have not. This is a big similarity — those with the money may or may not have been the entrepreneur/musician in the past. Make sure you know who is who, and you will save yourself some time and effort as you pitch and look for a champion in the organization!
H. The VC execs and the Record Label execs often survive quite a while by saying “No” a lot — Making a big mistake can be an issue for their careers, so they can sometimes play it way too safe. In the case of VC, if they have deployed too much capital from their fund too soon, they have less taste for a new deal. On the other hand, if there is too much un-deployed money for too long, they may feel a need to do a deal. Record label execs have timetables and annually budgeted funding issues. Not so different.
I. If your champion leaves the record label or the fund, you can become an orphan. Whether or not this makes economic sense, the remaining execs (or the new exec put on your account) may not care about your company/band, only about THEIR portfolio companies/bands.
One more note if you are the band in this case (and not the start-up): Since album and record sales are only part of the economics in 2010, record labels also will pick up a musical act for its touring audience and live performance revenues. Thus, the “I need a hit song” issue to some extent, at least for a while. Bands where the shows are followed around by vagabond fans are always a favorite, so, if you are one of the descendants of the Grateful Dead, that works!
For the start-ups out there: If you are making money as you approach the VC, revenues are nice, but won’t necessarily indicate what it takes to get big and address a big market. Find a good angel investor if you are not VC-ready or might not be VC-fundable — there is an angel out there waiting!
This is a question from a start-up entrepreneur that I answered on Quora:
Q: Is it typical for lead angel investors in a seed round to request the right to pro-rata participation at series A time?
Here is a quick “ABC” answer:
A. It is very typical, especially if I am the investor! Wouldn’t you ask for this if you were the investor?
B. Remember who brought you to the dance. I think it is fair and right to let ALL players from all rounds invest in the company at each juncture if at all possible and practical. The only issue in my mind has to be practicality – meaning if it truly would be impractical for reasons of timing or legal constraints and the like, not just mildly annoying to you or some investor who has not even heard of you yet. If you follow this path, you will have engaged and happy shareholders, not unhappy litigation regarding being shut out of opportunities.
C. Looking for a compromise position? Maybe you agree to (a) allow pro-rata investment into down rounds and only into the next up-round, or (b) cut the investor off from further up-rounds if the investor fails to participate in an up-round.
Also, please consider this: If you are worried about dilution too much, perhaps you are not understanding how important money is. My advice to clients and companies (and to myself when acting as the entrepreneur!) is almost always “take the money.” So, instead of pushing your early friends away, try to raise your valuation and include your friends.
OUCH! First of all, whose idea was that? I mean, I’m from Jersey, and this is embarrassing.
But beyond that, like the August 1979 “Death of Equities” BusinessWeek cover, this just screams out for a market call and analysis.
New American Lows: As it has throughout its history (yet, remarkably, even moreso now), America will continue to produce new anti-intellectual and least-common-denominator (LCD) lows for the foreseeable future.
What to Do: Invest in all of our societal human trainwrecks and plain old average folks who help them swirl down drains of banality and excess. Or, more accurately, in companies that feed their instant-gratification desires.
Stocks to watch — Companies in the following industries: gaming/gambling, tobacco, alcohol, fast food, fad products, brands or services, free dating services or the equivalent (Facebook/MySpace and newer, even more direct examples), inexpensive fashion/club-wear, inexpensive grooming supplies (Axe, or spray-on tan anyone?), abusable pharma manufacturers, adult/porn/playboy, payday lenders and pawn shops, money cards, “reality” TV, TMZ viewers, cheap resorts and cruises, etc.
Stocks to short — Companies that supply government and other institutions that are hurt by, or forced to clean up after, the LCD/trainwreck population with no savings and no future, including: colleges and universities, health clinics/hospitals, public or mainstream television, underfunded pension funds, insurance companies.
Get it? Got it? Good.
CEOs and Board chairpersons who are new to the role often find themselves dreading Board meetings. Why? Because they view them as a chore as opposed to an opportunity — like a book report in grade school.
Board members are there to help the company. Let them (us) help you!
One way to help Board members help you is a good Board package sent to all Board members in advance of your Board meetings.
Since I am just as often the Board Member as I am the Board presenter, here are 5 basic thoughts:
1. Board packages are not optional. A “Board package” is a set of materials and information that is sent to all Board members to help them prepare for the upcoming Board meeting. It should contain the proposed agenda for the meeting as well as information that will bring the Board up to speed on the latest efforts and achievements (and failures) of the company. The idea is that if you get this information out and reviewed in advance of the meeting, you will have a smarter, more-informed Board and a better, more productive meeting. After reviewing your Board package, your Board should be able to come into the meeting “up to speed.” Of course, this will make obsolete a more typical “dog and pony show” presentation where you simply read off your power-point and data sheets for 2 hours and only deliver the data you just sent out to the board members. This is as it should be. You do want the Board members’ input and help, not just to have them hear you drone out a stream of data that sounds impressive but leads nowhere, right? Right? If not, the Board will figure that out soon enough. As will all your team members. And the poor results (at least at Board meetings) will become obvious to all, until, eventually, one of your Board members will pipe up and demand a Board package. Head this one off at the pass – you will benefit greatly.
2. Discuss with your Board members what they would like to see in the Board package. Board packages are there so that you do not have to spend time at the Board meeting bringing everyone up to speed. So, they need to be sufficiently detailed to avoid the asking of “obvious” questions, yet not so detailed that nobody will read them. Ask your Board members individually what they expect to see in a Board package and find out the right level of detail (not too much, not too little) needed to encourage them to read and absorb your reports fully. Remember that each Board member will focus in on different areas (usually based on their personal background or interests). So, you may need to cover a particular area in more detail for one or more particular Board members. Use some bullet points to hit the highlights so that Board members who are less interested or knowledgeable in that area will be able to understand the basic story.
4. Ask Board members for Board-package feedback and Agenda additions right away. Ask your Board members to review the agenda right away and to skim the materials immediately upon receipt and contact you with thoughts, additions, etc. Board members may have an important agenda item to add, or may ask for one more item to be added to the package in order to assist their review. Also, the early delivery of the materials gives each Board member time to ask a couple of questions of, or get clarifications from, the CEO (or the CFO or other relevant management) in advance on issues and items that such Board member cares about (and might have input on) but that might bog things down if asked in the actual Board meeting. See this as an opportunity! If a Board member’s individual issues can be clarified/identified/disposed of “off-line” and in advance of the actual meeting, the meeting will be better and more productive for everyone. This also has the side benefit of helping you get to know your Board members better and learning how they can help you. And maybe the item identified is one that all of the Board may find of interest.
5. Don’t be afraid to circulate an updated agenda or additional materials. If something important happens before the meeting but after you have circulated the meeting Agenda and Board package, definitely send out an update. There is no reason to save it for the meeting. Also, if a Board member makes a smart comment or Agenda addition, note that and send it out. It will encourage all the other Board members to be more participatory and re-focus them on the Board package.
As an attorney, entrepreneur, investor and board member, I use my entire background to help captains of industry (from little admirals to true 5-stars) sail their ships and achieve their goals.
My way of breaking into business was as a lawyer with a top Wall Street firm. That was one steep learning curve — nearly sink or swim! On big securities offerings and IPOs, I often found myself focusing with greater interest on the deal and the players than the legal work. The most fun I had as a young lawyer was when I developed my own clients and relationships (including Japanese investment bank, Daiwa Securities). It was great to be the main advisor to the people making the decisions, not just another lawyer papering the deals others made.
I always asked a lot of business and “deal” questions of bankers and principals, and was always focused on the business aspects of deals. It became obvious to me (and to others) that I should move into business. But for many years I was not ready to make a change — I was not yet an entrepreneur, I had a house payment to make, etc.
So, after many years of corporate law firm practice, what business opportunity did I finally pursue? One I created and loved. I left the law to manage rock bands. If that sounds like a real left turn, and hardly a “business,” I agree, but I had been managing unsigned bands “in my spare time” for several years when I signed one of my artists to Epic Records. During my music management and publishing days, I learned plenty about entertainment contracts, IP and publishing, and also learned about the ups and downs of working directly with talent, agents, producers and entertainment execs. I even had my own entertainment lawyers and paid their fees. There were some real highlights, and I was now an entrepreneur of sorts.
Of course, once I left the mother ship of “big-law,” my eyes were opened to more possibilities. In 1999, I started a price engine/service called SalesMountain with some friends and raised a lot of capital. By 2000, we had a 150 employees in three countries, had a high-traffic consumer website with a reach across many portals, and the #3 mobile application in the US, just behind Yahoo! and Amazon. As co-founder and CEO, I learned a ton as we went from our May 1999 start-up to site launch in 2 months, a solid angel round in 4 months, and a February/March 2000 “last money in the world” B-round in 10 months, and I personally opened our foreign offices. When our customers (and potential acquirors) were pulling back and disappearing in late 2000 and early 2001, we made some bold moves, including the sale of our foreign operations. As a result, we made a profit for the domestic investors and our founder group at a time when others were delivering zeroes. I worked 15 hours a day, 7 days a week and gained some 15 lbs. It was challenging, but I would not trade in those years for anything, as many of the business lessons I learned then are core to my advice and actions today.
Following my dot.com experience, I considered a move back into law practice as a much-needed vacation! But there was one more deal to do in 2002: the purchase and restructuring of an aerospace engineering firm that I still run with one of my dot.com partners. Many more lessons learned. Soon afterward, I joined Tech Coast Angels and invested in more than a dozen companies (many more lessons learned there too!). And, finally, I also returned to the practice of law, this time as “Capitalist Counsel,” with a uniquely valuable background and a much deeper understanding of what great CEOs seek from their lawyers and how to serve their needs.
I am always wanting to learn more and share business and management ideas and best practices. In fact, for a long time, I have been meaning to write one of those “ten bullet-point” business books filled with allegories and nuggets of wisdom. Maybe this is it…