New Media companies should emphasize “media” over “new” June 29, 2009
Posted by jeremyliew in advertising, business models, media, startup, startups.4 comments
AdAge has a good article today about how AOL has been attacking web publishing where it notes:
In the heady days of early 2000, the megamerger of AOL and Time Warner heralded the web-based future of publishing. It would create a digital platform for Time Inc., the biggest, most-prestigious magazine group in the world.
Needless to say, that didn’t pan out, and here’s where it gets ironic. Just as Time Warner is unwinding that mistake, AOL is figuring out the future of magazine publishing on the web. And it’s doing so without Time Warner’s content assets.
The model goes something like this: Find a vertical with an audience attractive to advertisers, brand it (Daily Finance, Asylum, Lemondrop, Politics Daily), hire five to seven people to run it and plug in AOL’s traffic fire hose. Repeat.
This reminded me a little bit of the continual tension in media companies caused by serving two constituents – readers and advertisers. AOL has clearly discovered one path to repeatable success, which is to start with the needs of advertisers. This is emphasizing the “media” part of new media.
The new media companies that are doing the best in this recession have taken a similar approach. Companies like CafeMom, Flixster (a Lightspeed portfolio company) and Glam have focused on creating highly valuable inventory for endemic advertisers, and on building excellence in sales execution.
In contrast, some other startups have focused on the “new” part of new media. They have often created incredible compelling experiences for users, and have generated impressive traffic. But their monetization ability has lagged; sometimes due to creating inventory that is hard to sell, sometimes because the startu’ps culture is not inimical to ad sales.
Here in Silicon Value there can be a tendency to overemphasize product and technology and underemphasize ad sales. Advertising revenue often scales with ad sales people. Yet I have seen some startups that have been disappointed with their revenue growth but have >10% of their employees focused on revenue.
Like AOL, new media companies should remember that they are also media companies, and organize themselves appropriately. This can include doing things like:
- Building traffic with a consideration for your ability to package and sell it to advertisers
- Placing significant company and senior management attention on revenue. This can mean up to 30-50% of employees working on revenue generating activities
- Adding advertising sales expertise and contacts to the management team
- Being flexible about tradeoffs between advertiser needs and user needs
Many new media companies based outside of Silicon Valley (especially those in New York) grasp this innately.
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For more in this vein read two prior posts; on the preeminent importance for sales excellence in ad networks, and on the three ways to build an online media business to $50m in revenue.
Some startup CEOs’ New Years resolutions January 5, 2009
Posted by jeremyliew in 2009, start-up, startup, startups.Tags: new years resolutions
7 comments
I asked my CEOs what their New Years Resolutions were. Here is what they resolved:
Jonathan Kibera of specialty ecommerce company Mercantila was alliterative in his focus on revenue:
Simplicity: Reduce the # of components necessary to generate revenue.
Stability: Be consistently excellent at each of these components.
Scale: Drive as much business as possible.
Lance Tokuda of social apps developer Rockyou is equally focused on revenue and mindful of the economy:
Optimize for revenue generation over growth to preserve cash in a weak advertising market.
Scott Albro of B2B media company Tippit knows what to worry about and what to not waste angst on:
Focus on what we can control and make sure, every day, that what we can control is more powerful than what we can’t.
Ed Baker of mobile virality company Demigo will be focused on execution in 2009:
Set realistic deadlines and meet them. While I will continue to encourage and work with the team to set aggressive milestones for each of our weekly releases, we need to do a better job of making sure we always meet these deadlines, and don’t let them slip.
Joe Greenstein of social movie site and app developer Flixster is making sure that his team feels the love:
Make sure everyone at flixster knows how much they matter. The further we get into this business, the more it is clear to me how directly responsible the talent and commitment of our team is not only for the successes we have had thus far, but for our hopes for the future and for the quality of the experience along the way. In a difficult economy especially, my 2009 new year’s resolution is to make sure everyone at Flixster knows that this is our company, to succeed or fail by our efforts and to be shaped along the way by our collective vision.
Amy Jo Kim of casual game publisher Shufflebrain (Photograb) is letting users guide product development as much as the company’s own vision.
My resolution is to listen to — and learn from — what the market is telling us, and mine the unexpected opportunities that are coming our way.
Siqi Chen of social game publisher Serious Business (Friends For Sale) will be putting in place the infrastructure to support the same key philosophical commitment:
In the new year, I resolve to get better at making data driven (characterize, hypothesize, predict, and test) decisions. This is an obvious point to most entrepreneurs these days, but the past year has really shown us that it isn’t as simple as just deciding to be data driven one day. Building the technology infrastructure and the engineering culture that makes this possible at scale are non-trivial projects. We’ve gotten a lot better at this in the short history of our company, but we’ve still got a long way to go, and we intend to continue to improve on this in 2009.
And finally David Scott of casual game maker Casual Collective sought more explicit communication and introspection:
Every Friday afternoon we will set aside time (away from our screens) to discuss all the things we achieved that week and list all we want to achieve in the following week. This will help keep everyone aware of what everyone else is doing, spark discussions and ideas that otherwise may not have happened, end the week with a better sense of achievement, and help us hit the ground running on Monday mornings. With such a small team we also need to better prioritize tasks.
And to lose weight of course
What are your new years resolutions for your company?
How bad is it for startups seeking financing? November 24, 2008
Posted by jeremyliew in VC, Venture Capital, start-up, startup, startups.14 comments
It is difficult for startup companies to raise venture capital at the best of times. A venture capitalist might get emailed 5-10 pitches from startups each day. Over the course of a year that adds up to 2,500-5,000 pitches. Of those pitches, that venture capitalist might fund one or two companies. Not great odds for a startup. Granted, some of the other startups may raise funding from other venture capital firms, but even so, it’s a chancy proposition.
Recently, startups have been facing an even more difficult environment for raising capital. There are three factors that are contributing to this. Some of these factors will change in the short term, but others will likely continue to be a factor for a while. From longest to shortest then:
Angel financing has dried up. Often, when a company is too early to raise institutional venture capital it will raise money from angel investors – wealthy individuals. According to the Center for Venture Research, $26B was invested by angels in 2007, a marked increase compared to $15.7B in 2002. The precipitous drop in stock markets and housing markets since the beginning of the year has made many angel investors nervous about making new investments in risky and illiquid startups. Many angel investors will likely sit on the sidelines until we see a rise in stock markets and in consumer confidence. While the companies who raise angel financing would not likely have raised from venture capital firms anyway, a slowing down of angel financing will mean that less companies are ready for institutional venture capital in the next few years.
A slowing economy has reduced near term revenue growth expectations. We are in a recession. While for many startups, the micro factors (e.g. Did we hire our second sales person in Q1 or Q3? Was our VC able to introduce us to BigCo for a distribution deal?) trump the macro factors, startups still operate in the same economy as everyone else. With consumers and enterprises alike watching their spending closely, even the most promising startups are likely to see slower growth than they might have projected a year ago. Slower revenue growth usually translates into a longer period before the company gets to profitability, and hence more capital required. Strong companies will still get funded, but each financing may be a little larger than in the recent past to give the companies the additional runway to get to profitability. As a result, there may be a slight reduction in the overall number of financings (given that the pool of available capital is largely the same) and some marginal companies will not be able to raise capital. Since early stage venture capital firms by definition take a long term view, this impact is likely small, but will persist until investor expectations for consumer and enterprise spending improve. As we get additional data on the likely length and depth of this recession through 2009, this effect will likely disappear.
Venture Capitalists are focusing on their portfolio companies. The slowing economy affects not just companies raising finance, but also companies that have already been funded. VCs are currently fully engaged with their current portfolio, helping them to prepare for a tough 2009. Many entrepreneurs are first time CEOs, and some were not even in the workforce during the last recession. They are turning to their VC investors to help them think through what actions their companies need to take to adjust; cost reductions, changes in strategic direction, or otherwise. This takes time. Time spent by VCs with portfolio companies is time not spent looking at new potential investments. As a result, companies currently seeking financing may not get the same level of attention that they might have received a few months ago. The good news for startups is that this is a short term effect. 2009 planning should be completed within the next few weeks, and certainly after the holidays, venture capitalists time will once again free up to look at new deals.
Better time ahead. Although startups seeking financing right now may have a tough time, as these factors fade away they should see a relative improvement in the very short term. As the market will only improve, startups looking to raise new financing should try to defer for as long as possible. This may require cutting costs to extend the cash runway, reducing the scope of projects, prioritizing revenue over new features or looking to existing investors to provide a bridge loan. But do not lose hope! Promising companies will continue to get funded, with the pace returning to close to normal by part way through 2009.
Founders, be ready for the long haul November 10, 2008
Posted by jeremyliew in M&A, exits, start-up, startup, startups.13 comments
The chart below shows the average time in years between a startup’s first equity investment (usually Series A) and its sale, for companies sold in each year from 1997 to 2007. (Source is Dow Jones Venture One/E&Y study)
As you can see, companies sold in 2007 had seen almost seven years pass since their first financing. Often they were founded up to a year before they took their first financing, so they were likely eight years old when they were sold. These numbers are averages – some companies exit faster, but some exit slower as well.
This data represents M&A exits. Usually the time to exit via IPO is even longer.
Although no data is available yet for 2008, there has been virtually no venture backed IPO activity in 2008, and the number of M&A tractions is sharply down from previous years. That means that the time to liquidity is likely getting longer.
Obviously, these are backward looking metrics (2007 numbers refer to companies that were sold in 2007, not companies that were started in 2007). However, founders of companies looking to raise venture capital should be ready for the long haul. You can’t start a company and expect a quick flip.
Consumer confidence is at an all time low – factor this into your 2009 planning. October 29, 2008
Posted by jeremyliew in Consumer internet, business models, economics, start-up, startup, startups.1 comment so far
The Consumer Confidence Index (CCI) measures how optimistic consumers are about the state of the economy. Specifically, it measures how consumers are feeling about:
1. Current business conditions.
2. Business conditions for the next six months.
3. Current employment conditions.
4. Employment conditions for the next six months.
5. Total family income for the next six months.
Notes Investopedia:
In the most simplistic terms, when [CCI] is trending up, consumers spend money, indicating a healthy economy. When confidence is trending down, consumers are saving more than they are spending, indicating the economy is in trouble. The idea is that the more confident people feel about the stability of their incomes, the more likely they are to make purchases.
The Conference Board, which measures the CCI, announced yesterday that:
The Conference Board Consumer Confidence Index™, which had improved moderately in September, fell to an all-time low in October. The Index now stands at 38.0 (1985=100), down from 61.4 in September…
Says Lynn Franco, Director of The Conference Board Consumer Research Center: “The impact of the financial crisis over the last several weeks has clearly taken a toll on consumers’ confidence. The decline in the Index (-23.4 points) is the third largest in the history of the series, and the lowest reading on record. In assessing current conditions, consumers rated the labor market and business conditions much less favorably, suggesting that the fourth quarter is off to a weaker start than the third quarter. Looking ahead, consumers are extremely pessimistic, and a significantly larger proportion than last month foresees business and labor market conditions worsening. Their earnings outlook, as well as inflation outlook, is also more pessimistic, and this news does not bode well for retailers who are already bracing for what is shaping up to be a very challenging holiday season.”
As a point of comparison, the CCIs most recent peak was at 112 in July 2007. It is down by two thirds since then. The last CCI trough was at 61 in March of 2003, down from a peak of 144 in May 2000. This time around consumer are far more concerned than they were in even the depths of the last economic slowdown. Historical CCI stats are available here.
All consumer facing companies, whether ad based or commerce based, should bear these numbers in mind when planning for Q4 2008 and for 2009.
Which online media companies will survive the ad recession? October 6, 2008
Posted by jeremyliew in advertising, start-up, startup, startups.15 comments
As I have mentioned previously, we are entering an overall advertising recession and even online advertising growth has slowed. Notes the LA Times in August:
“Advertisers have pulled back in a pretty meaningful way, and display is feeling the brunt of it,” said Clay Moran, a Stanford Group analyst who recently wrote a research report called “Online Advertising: caution required.”
In recent weeks:
* Yahoo Inc. Chief Executive Jerry Yang told analysts that demand for display advertising was “softening.”
* Online publisher Tech Target Inc. lowered its third-quarter forecast, blaming “macroeconomic weakness in the U.S. and its impact on advertising spending.”
* Lending site Bankrate Inc. cut its 2008 guidance. CEO Thomas Evans explained that the company had “continued to experience softness in display advertising from several of our largest financial advertisers.”
* Ad network ValueClick Inc., based in Westlake Village, blamed the economy for a slowdown in display advertising, which led to a 6% drop in its second-quarter profit.
What does this mean for startups? When advertising budgets dry up, three things happen:
1. Advertisers buy what they know
This has two implications. The first is simply brand recognition. It is much easier to make the case to buy media on a well known site. As a result, scale matters. The leaders in both web 1.0 (AOL, Yahoo, Cnet etc) and web 2.0 (Facebook, Myspace, Rockyou*, Digg etc) will continue to see high demand for their advertising inventory.
As the web 1.0 leaders are already at scale, they may see greater negative effects from the overall market, but there will continue to be a strong core of demand. Many of the web 2.0 companies have grown out their traffic and brand in advance of their sales forces, so they may be able to ride the growth of their sales teams to better mitigate the market effects.
But being big (5m+ UU/mth), and a leader in your category, will help a lot.
The second implication is that advertisers will continue to buy advertising against targeted content. Advertisers are used to buying content adjacencies. Targeting against users (whether behavioral or demographic targeting) can’t be counted on to lift CPMs in the next couple of years.
Sites with highly targeted content that attracts endemic advertisers (Flixster*, iLike, Streetfire.net* etc) or demographic clusters (TMZ, PopSugar, AskMen etc) will be better off than broad reach sites.
2. Experimental budgets are the first to get cut.
In an ad recession, advertisers appetite for experimentation is low. They like to stick to the established ad standards. New forms of advertising are hard. Startups whose sales processes feel more like business development than selling off of a rate card may have a tougher time.
Companies selling standard ad units will weather the recession better than those that have unique ad units.
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3. Marketers keep funding direct response advertising.
The brightest spot in an ad recession is direct response. As Ad Age notes:
Many analysts now agree that when marketing budgets come under pressure in a stressed economy, those sectors that can best document their connection to ROI, such as search-engine advertising, are far more attractive to corporate chiefs than other kinds of less-trackable traditional advertising.
Direct marketers will continue to spend to acquire customers if that spend can be directly tracked to a sale. Lead gen companies (Quinn Street, Tippit*, LowerMyBills etc) will hold up better, as will companies with CPC and CPA models (Google, TripAdvisor, $uperRewards, etc). However, they may also be affected if the overall number of people “in market” goes down, or prospective buyers become less likely to buy, due to the overall economy slowing down.
Who will have it toughest? Sites that are sub scale (<1m UU month), with no targeted content AND selling custom ad units are going to have to work the hardest over the next few years. Great teams always find a way, but the road may be long and hard.
What are your thoughts as to what sort of online media companies will survive the ad recession best?
UPDATE: WSJ also finds that experimental budgets are getting cut
FURTHER UPDATE: Which companies might benefit from an online ad recession?
* Rockyou, Flixster, Streetfire.net and Tippit are Lightspeed Portfolio companies.
What impact will the credit crunch have on venture financing for startups? October 1, 2008
Posted by jeremyliew in VC, Venture Capital, financing, start-up, startup, startups, venture debt.6 comments
An entrepreneur asked me recently if I was concerned about the impact the credit crunch will have on venture financing for startups. I responded:
For high quality companies, the short answer is no. The more nuanced answer is that
(i) The credit crunch will impact venture debt (already has) so people can’t count on that to extend their runway, so should raise a bit more than they would have done
(ii) If the economy indeed slips into recession (as a second order effect of the credit crunch), then this will impact sales growth for many startups, whether selling to enterprises or consumers. This will also impact timelines to profitability, and hence amount raised. It will also likely cause some angels and some venture firms (especially corporate venture firms and firms with a shorter time horizon) to become less active investors.At Lightspeed as we take a long term view towards the companies we invest in. However, we are urging them to be conservative in their revenue projections and hence cash planning (both from amount raised and from cash burn perspective).
GigaOm weighs in on the venture debt issue in particular
Fewer, costlier loans. No way around it, money is getting more expensive. As long as banks are licking their wounded balance sheets, they won’t make loans that carry even a whiff of risk. This could raise borrowing costs and complicate growth for capital-intensive sectors, like telecom.
A more immediate problems lurks in short-term lending such as commercial paper. Interest rates in that part of the market have recently risen from 2 percent to 4.5 percent for riskier companies, according to Businessweek.
Fred Wilson has a similar perspective on the venture capital market:
All startups are going to have to batten down the hatches, get leaner, and work to get profitable, but the venture backed startups are going to get more time to get through this process than those that are not venture backed. Here’s why.
Venture capital firms are largely flush with capital from sources that are mostly rock solid. If you look back at the last market downturn, most venture capital firms did not lose their funding sources (we did at Flatiron but that’s a different story). If you are an entrepreneur that is backed by a well established venture capital firm, or ideally a syndicate of well established venture capital firms, then you have investors who have the capacity to support your business for at least 3-5 years (for most companies).
Venture capital firms will get more conservative and they will urge their portfolio companies to do everything Jason suggests (and more), but they will also be there with additional capital infusions when and if the companies are making good progress toward a growing profitable business.
If you go back and look at the 2000-2003 period (the nuclear winter in startup speak), you’ll see that venture firms continued to support most of their companies that were supportable. The companies that were clearly not working, or were burning too much money to be supportable in a down market, got shut down. But my observation of that time tells me that at least half and possibly as much as two/thirds of all venture backed companies that were funded pre-market bust got additional funding rounds done post bust.
So if you run or work in a startup company that is backed by well established venture capital firms, take a brief sigh of relief and then immediately get working on the “leaner, focused, profitable” mantra and drive toward those goals relentlessly.
If, on the other hand, you are just starting a company, or have angels backing you, or are backed by first time venture firms that are not funded by traditional sources, then I think you’ve got a bigger problem on your hands. It’s not an impossible problem to solve, but you have to start thinking about how you are going to get where you want to go without venture funding.
I say that because in down market cycles, it’s the seed and startup stage investing that dries up first. It happens every time. Seed/startup investing is most profitable early in a venture cycle and late stage investing is most profitable late in a venture cycle. It makes sense if you think of venture capital as a cyclical business and it is very cyclical. Early in a cycle you want to back young companies at bargain prices and enjoy the demand for those companies as the cycle takes hold. Late in a cycle you want to back established companies that need a “last round” to get to breakeven and you can get that at a bargain price compared to what others paid before you. I’ve been in the venture capital business since 1986 (that was a down cycle) and I’ve seen this happen at least three times, probably four times now.
There’s another important reason why seed and startup investing dries up in down cycles. Venture firms don’t need to spend as much time on their existing portfolio companies when things are going well. A rising market hides a lot of problems. But when things go south, they tend to become inwardly focused. I believe we are headed into a period where venture firms will spend more time on their existing portfolio and less time adding new names to it.
Plan appropriately
What entrepreneurs need to know about Founders’ Stock September 15, 2008
Posted by jeremyliew in Entrepreneur, VC, Venture Capital, financing, founders, start-up, startup, startups.24 comments
This is a guest post by John Bautista. John is a partner in Orrick’s Emerging Companies Group in Silicon Valley. John specializes in representing early stage companies.
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When entrepreneurs start a company, there are four things they need to know about their stock in the company:
• Vesting schedule
• Acceleration of Vesting
• Tax traps
• Potential for future liquidity
VESTING SCHEDULE
The typical vesting schedule for startup employees occurs monthly over 4 years, with the first 25% of such shares not vesting until the employee has remained with the company for at least 12 months (i.e. a one year “cliff”). Vesting stops when an employee leaves the company.
Even Founders’ stock vests. This is to overcome the “free rider” problem. Imagine if you start a company with a co-founder, but your co-founder leaves after six months, and you slog it out over the next four years before the company is sold. Most people would agree that your absentee co-founder should not be equally rewarded since he was not there for much of the hard work. Founder vesting takes care of this issue.
Even if you’re the sole founder, investors will want to see your founder’s stock vest. Your ability and experience is one of the key assets of the company. Therefore, venture capital firms, especially in the early stages of a company’s development and funding process, want to make sure that you are committed to the company long term. If you leave, the VCs also want to know that there is sufficient equity to hire the person or people who will assume your responsibilities.
However, many times vesting of founders’ shares will follow a different schedule to that of typical startup employees. First, most founder vesting is not subject to the one year cliff because founders usually have a history working with each other, and know and trust each other. In addition, most founders will start vesting of their shares from the date they actually started providing services to the company. This is possible even if you started working on the company prior to the issuance of founders’ stock or even prior to the date of incorporation of the company. As a result, at the time of company incorporation, a portion of the shares held by the founders will usually be fully vested.
This vesting is balanced by investors’ desire to keep the founders committed to the company over the long term. In Orrick’s experience, venture capitalists require that at least 75% of founders’ stock remain subject to vesting over the three or four years following the date of a Series A investment.
ACCELERATION OF VESTING
Founders often worry about what happens to the vesting of their stock in two key circumstances:
1. They are fired “without cause” (i.e. they didn’t do anything to deserve it)
2. The company gets bought.
There may be provisions for acceleration of vesting if either of these things occur (single trigger acceleration), or if they both occur (double trigger acceleration).
“Single Trigger” Acceleration is rare. VC’s do not like single trigger acceleration provisions in founders’ stock that are linked to termination of employment. They argue that equity in a startup should be earned, and if a founder’s services are terminated then the founders’ stock should not continue to vest. This is the “free rider” problem again.
In some cases founders can negotiate having a portion of their stock accelerate (usually 6-12 months of vesting) if the founder is involuntarily terminated, or leaves the company for good reason (i.e., the founder is demoted or the company’s headquarters are moved). However, under most agreements, there is no acceleration if the founder voluntarily quits or is terminated for “cause”. A 6-12 month acceleration is also usual in the event of the death or disability of a founder.
VC’s similarly do not like single trigger acceleration on company sale. They argue that it reduces the value of the company to a buyer. Acquirors typically want to retain the founders, and if the founders are already fully vested, it will be harder for them to do that. If founders and VC’s agree upon single trigger acceleration in these cases, it is usually 25-50% of the unvested shares.
“Double Trigger” Acceleration is more common. While single trigger acceleration is often contentious, most VC’s will accept some double trigger acceleration. The reason is that such acceleration does not diminish the value of the enterprise from the acquiring company’s perspective. It is arguably in the acquiring company’s control to retain the founders for a period of at least 12 months post acquisition. Therefore, it is only fair to protect the founders in the event of involuntary termination by the acquiring company. In Orrick’s experience, it is typical to see double trigger acceleration covering 50-100% of the unvested shares.
TAX TRAPS
If things go well for your company, you’ll find that its value increases over time. This would ordinarily be good news. But if you are not careful you may find that you owe taxes on the increase in value as your Founder’s stock vests, and before you have the cash to pay those taxes.
There is a way to avoid this risk by filing an “83(b) election” with the IRS within 30 days of the purchase of your Founder’s shares and paying your tax early on those shares. One of the most common mistakes I’ve encountered with founders is their failure to properly file the 83(b) election. This can have very serious effects for you, including creating future tax obligations and/or delaying a venture financing of the company.
Fortunately, over the years, I’ve developed a number of work-arounds (depending on the circumstances) and we can many times find a solution that puts the founder back in the same position had the 83(b) election been properly filed. Nevertheless, this is one of the first things that your lawyer should check for you.
Of course, you’ll still owe tax at the time of sale of the shares if you make money on the sale. But by then, I’m sure you’ll be able and happy to pay!
POTENTIAL FOR FUTURE LIQUIDITY
Founders’ stock is almost always common stock because VC’s purchase preferred stock with rights and preferences superior to the common stock. However, recently my law firm (Orrick, Herrington & Sutcliffe LLP) has created a new security for founders which we call “Founders’ Preferred” which enables founders to hold some of their shares in the form of preferred stock. This allows them to sell some of their stock prior to an IPO or company sale.
The “Founders’ Preferred” is a special class of stock that founders can convert into any series of preferred stock sold by the company to VC’s in a future round of financing. The founders would only choose to convert these shares when they plan to sell those shares to VC’s or other investors in that round of financing. This special class of stock is convertible into the future series of preferred stock on a share for share basis. Except for this conversion feature, this class of stock is identical to common stock.
The benefit to you is that you are able to sell your shares at the price of the future preferred round. This avoids multiple problems associated with founders attempting to sell common stock to preferred investors at the preferred stock price.
Furthermore, the benefit to the preferred investors is that they can purchase preferred stock from the founder as opposed to common stock.
“Founders’ Preferred” can usually only be implemented at the time of the first issuance of shares to founders. Therefore, it is important to address the advantages and disadvantages of issuing “Founders’ Preferred” at the time of company formation. I normally recommend for founders who want to implement “Founders’ Preferred” that such shares cover between 10-25% of their total holdings, the remainder being in the form of common stock. The issuance of “Founders’ Preferred” remains a new development in company formation structures. Therefore, it’s important to consult legal counsel before putting this special class of stock into effect.
Many VCs do not like to see Founders’ Preferred in a capital structure.
CONCLUSIONS
As discussed above, there are a number of issues to address when issuing founders’ stock. In addition to business terms associated with the appropriate vesting schedule and acceleration of vesting provisions, founders need to be navigate important legal and tax considerations. My advice to founders is to make sure to “get it right” the first time. Although here are many companies on the web that specialize in helping founders by offering forms for setting up companies, it is important that founders get the right business and legal advice, and not just use pre-packaged forms.
This advice should begin at the time of company formation. A little bit of advice can go a long way!
How to interview key hires II: Behavioral interviewing September 10, 2008
Posted by jeremyliew in HR, hiring, interviewing, start-up, startup, startups.2 comments
Recently I posted about how to interview key hires, focusing on the three areas to test a potential hire on:
1. Technical Skills
2. Cultural Fit
3. Performance Skills
Technical skills and cultural fit are relatively easy to interview for (although you may need to borrow advisers or friends with the technical skills of the function that you are hiring for to help you with the interviewing).
Performance skills tell you how well they can do a job. These include characteristics such as attention to detail, problem solving, initiative, leadership and team work. I have found that behavioral interviewing is the best way to test for performance skills. From SUNY Brockport:
Behavioral interviewing is a style of interviewing that was developed in the 1970’s by industrial psychologists. Behavioral interviewing asserts that “the most accurate predictor of future performance is past performance in a similar situation.”… Behavioral interviewing emphasizes past performance and behaviors.
First and foremost, it is important that you and your co-founders and other key leaders in the company agree on what performance skills you are testing for. While ideally you would like all your key hires to be great at everything, there are likely a set of 3-5 performance skills that are critical. For example, someone in a sales role might need to have a strong customer focus, an ability to influence and persuade, experience negotiating and good relationship management skills. A product manager might need to have high attention to detail, product vision, skills in working across functions and expertise at planning and prioritizing. Agree on what performance skills are important in advance.
Once a short list of performance skills has been created, each interviewer should develop a different question to ask the candidate about this performance skill. These questions should focus on asking about specific past experiences and outcomes. For example, if the performance skill being tested was initiative, questions [and interpretive guides] could include (with a credit to Novation’s SkilAnalyzer):
Tell me about a situation in which you aggressively capitalized on an opportunity and converted something ordinary into something special. [Did the candidate put a unique twist on a routine situation to yield positive results? Was there an accomplishment of little magnitude or that should have been expected of anyone in that situation?]
Describe something you’ve done that shows how you can respond to situations as they arise without supervision. [Did the candidate take reasonable and quick action with an appropriate amount of information or research, warranting the independence? Was there use of authority inappropriately, excess procrastination, or a bad decision?]
Think of a slim sales lead that you converted into a big sale. How did you do it? [Did the candidate follow up on a lead that offered little chance of success, and move it to a success level that justified the effort? Was there a trivial effort, possibly with insignificant rewards?]
Described a time when you voluntarily undertook a special project above and beyond your normal responsibilities. [Did the candidate volunteer for a task despite an already full workload and succeed without undue compromise to other responsibilities? Was there an insignificant addition, or sacrifice of other areas?]
Many people have good ideas, but few act on them. Tell me how you’ve transformed a good idea into a productive business outcome. [Did the candidate generate a meaningful action plan to bring the idea to reality? Was there a haphazard, unrealistic, unproductive transformation?]
Tell me about a time when you anticipated an opportunity or problem and were ready for it when it happened. [Did the candidate prepare an approach that would be ready to launch upon the event's occurrence? Was there a slow trial-and-error response to the event, and resulting in only modest benefits?]
For these or any other questions that you ask, make sure that you keep the candidate talking about a single, specific instance that occurred in the past. Don’t let a candidate talk about generalities (“I always like to …”), or about how they would react (“If I got a sales lead like that I would…”). You are looking for a simple structure: Situation; Action; Outcome. Make sure that you get all three in detail.
Probe carefully to understand who was involved in decisions and what was the candidates work versus the work of people around them. Press on any instance of “we” to see what exactly the candidate did, versus what her team mates, reports or boss did. And make sure you know what impact their actions had, whether positive or negative, major or minor.
It is hard to make up stories about past experiences. That is why behavioral interviewing works so well. You’ll be surprised just how much a candidate will tell you, and how much it tells you about them, when you follow this approach.
Being wise versus being smart September 4, 2008
Posted by jeremyliew in Entrepreneur, start-up, startup.4 comments
Great post today from Sim Simeonov about being wise vs being smart that I’ll quote in its entirety since it is so short:
There is a set of interrelated concepts I’m fond of reminding entrepreneurs about but I’ve never found a really good way to summarize them into a sentence that conveys the right meaning and tone. Here are various renditions:
* Be different, not best
* Do less, not more
* Go around a wall, not through it
* It is better to figure out how not to have to solve a problem as opposed to having to solve the problem.A while back I was talking to my friends at Kaltura about this and CEO Ron Yekutiel told me about a saying he’d heard about the difference between smart and wise people.
The difference between a smart person and a wise person is that a wise person knows how not to get into situations that a smart person knows how to get out of.
