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Do Aspergers, ADD and dyslexia make you more likely to be an entrepreneur? June 3, 2012

Posted by jeremyliew in founders, startups.
Tags: ,
4 comments

The Economist in it’s latest edition suggests that business needs people with Asperger’s syndrome, attention-deficit disorder and dyslexia:

 Julie Login of Cass Business School surveyed a group of entrepreneurs and found that 35% of them said that they suffered from dyslexia, compared with 10% of the population as a whole and 1% of professional managers. Prominent dyslexics include the founders of Ford, General Electric, IBM and IKEA, not to mention more recent successes such as Charles Schwab (the founder of a stockbroker), Richard Branson (the Virgin Group), John Chambers (Cisco) and Steve Jobs (Apple).

It also gives some data on ADD among entrepreneurs, and more anecdotal info on Aspergers among entrepreneurs, which I think would be the least controversial claim in the tech world. Which founders do you know that have Aspergers, ADD or dyslexia?

Two is a good number of founders May 14, 2012

Posted by jeremyliew in Entrepreneur, founders, start-up, startup.
1 comment so far

I’ve long held that two is a good number of (co)founders. One is difficult because you don’t have a true thought partner to talk to, or to tell you when you might be being crazy. To everyone else, you’re the CEO and the boss, and that power dynamic mitigates what they are willing to tell you.

Three can lead to a “two on one” situation, which can be destabilizing. It doesn’t always have to be unstable, but it is a risk.

Four or more and the equity cuts start getting pretty small for cofounders.

Douglas Merrill (CEO of Zestcash, one of our portfolio companies) has a nice post in HuffPo about how to work best with a cofounder that is well worth reading in its entirety. I paraphrase his five rules as follows:

  1. Be different, but not too different
  2. Share core values
  3. Compromise on work styles
  4. Overcommunicate to the team about your relationship, agreements and disagreements
  5. Find a trusted tie breaker

Read the whole thing.

What is the right age to found a company? February 29, 2012

Posted by jeremyliew in founders, startups.
Tags: , , , ,
6 comments

I read a story in this weeks economist that surprised me. It claimed that founding new businesses is not just a young persons game, but rather that the average age of a founder of a tech startup was 39.

Research suggests that age may in fact be an advantage for entrepreneurs. Vivek Wadhwa of Singularity University in California studied more than 500 American high-tech and engineering companies with more than $1m in sales. He discovered that the average age of the founders of successful American technology businesses (ie, ones with real revenues) is 39. There were twice as many successful founders over 50 as under 25, and twice as many over 60 as under 20. Dane Stangler of the Kauffman Foundation studied American firms founded in 1996-2007. He found the highest rate of entrepreneurial activity among people aged between 55 and 64—and the lowest rate among the Google generation of 20- to 34-year-olds. The Kauffman Foundation’s most recent study of start-ups discovered that people aged 55 to 64 accounted for nearly 23% of new entrepreneurs in 2010, compared with under 15% in 1996.

There is definitely an availability bias (dominated by people like Mark Zuckerberg and Bill Gates) that leads us to think that tech startup founders drop out of college to start their companies. But I did a quick and informal poll with my partners and found results consistent with Wadhwa’s findings. Roughly 50% of the founders of our current portfolio were in their 30s when they founded their companies, with roughly equal numbers in their 20s to their 40s:

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I went one level deeper, and compared the ages of the founders of internet companies to those of infrastructure companies:

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Here we start to see a difference – although half of founders in both categories are in their 30s, the remainder tend to skew to their 20s for internet companies and to their 40s for infrastructure companies.

This squares with my intuition more- what do you think?

Common mistakes of first time (technical) founders January 14, 2011

Posted by jeremyliew in founders, mistakes.
3 comments

There is a great thread over on Quora answering “what are the most common mistakes first time entrepreneurs make?”. The current top rated answer is from Siqi Chen, one of the co-founders of Serious Business. We funded Siqi and Alex Le at Serious Business. I’ve reproduced Siqi’s answer below but it is worthwhile to follow the link to Quora to read other answers, and the comment thread on Siqi’s answer.

I believe that self awareness and humility are two strong predictors of long term success. I think Siqi showed both qualities in great abundance at Serious Business, and in his answer below. I know that he is learning a lot about how to be a better executive while at Zynga, and I hope to one day work with him again.

I would note that there was no inconsistency in the hiring bar applied to the rest of the management team at Serious Business; Charles Hudson and Mike Jimenez are now cofounders of Atomic Panda and Ryan Ferrier is Chief of Staff at Crowdflower.

 

These are the greatest mistakes I believe we’ve made at Serious Business:

1. Undervaluing Management Competency
We underestimated the difficulty of managing a team and undervalued the skills of general management, process, and strategy. This failure stemmed from the very top down (that is, me) and affected every level of the company. Having never had any direct reports prior to Serious Business, I simply didn’t know what I didn’t know.

2. Lack of Strategic Focus
We used our limited resources as a startup to attack markets we didn’t understand instead of focusing on our core competencies, which were fairly unique in the market. And we did this repeatedly.

3. Inconsistent Hiring Bar
We’ve made some uneven hires over the course of Serious Business. While we’ve tried our best to maintain an exceptionally high bar, it has been consciously lowered during dry spells of hiring. This has always been a mistake. (This was somewhat mitigated by the fact that we’ve been pretty good at letting under-performers go quickly.)

4. No Product Management Support
For a while, we had a goal of hiring no product managers, ever – with the intention that we would end up hiring product focused engineers. This was a mistake. We ended up with two part-time product managers/designers (Alex and I) supporting (at one point) 3 separate live products with multiple millions of users each. This does not work.

This is the most common mistake I’ve seen other first time entrepreneurs
make:

Overvaluing the Idea
The Silicon Valley wisdom that Execution > Idea hasn’t penetrated as far as it needs to. There are still too many entrepreneurs who are chasing that perfect idea instead of focusing on building the team and processes to make the idea irrelevant

What entrepreneurs need to know about Founders’ Stock September 15, 2008

Posted by jeremyliew in Entrepreneur, financing, founders, start-up, startup, startups, VC, Venture Capital.
36 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.

_____________________________________________________________________________________

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!

What happens to a startup if the founder dies? May 28, 2008

Posted by jeremyliew in founders, start-up, startup, startups.
1 comment so far

Paul Kedrosky points to a paper by Hans Hvide asking, “What happens to a startup if the founder dies?“:

I analyze the causal effect of the founder for firms in their infancy by using variation in the occurrence of founder death. Both cross-sectional and within-firm estimates suggest that founder death has only a slight effect on firm performance, as measured by firm survival, profitability, or growth. I interpret this as the founder being substitutable even in a firm’s infancy and that the main function of the founder is to discover new opportunities and setting up the firm rather than managing it.

Or as Paul sums it up:

Hey, What if the Founder Gets Hit By a Bus? Nada

It is hard to reconcile this research with our our investment experience; we have found that strong founding teams matter a great deal. In fact, we specifically include as part of Lightspeed‘s stated mission “to partner with exceptional entrepreneurs “.

Digging deeper into the research paper sheds some light into the potential areas of disconnect. Hvide’s research is based solely on a set of 6,800 companies started in Norway between 1996 and 2003. Of these, only 40 were information technology companies where the founder died. These two facts may be two reasons that the conclusions from Hvide’s research are not broadly applicable to the sorts of company in which we typically invest.

At least Hvide’s research gives comfort to VCs who invest in non tech Norwegian startups founded by unhealthy or risk taking entrepreneurs. Unfortunately, or perhaps fortunately, Lighstpeed isn’t such a VC firm!