The following is an entertaining and oh-so-true guest post by Ivan Gaviria – friend and startup lawyer exraordinaire. Ivan is a partner at Gunderson Dettmer’s Silicon Valley office, practicing in the Corporate and Securities Group. He has extensive experience working with startup and emerging growth companies through their entire lifecycle as well as representing venture capital, private equity and other investors.
Oh, and warning: harsh language below – nothing new to you Valley-types…
Ten Classic Valley Clichés
by Ivan Gaviria
As a partner in a startup law firm I have spent countless hours in board meetings over the years. This front row seat has led me to conclude that one of the Valley’s underappreciated contributions to society is the wealth of catchphrases, clichés and buzzwords that permeate the culture. Ignoring the industry specific hacker and technical slang and the trendier offerings, there are a number of phrases that seem particularly unique to world of venture backed startups and have stood the test of time. The following are a couple of my favorites:
“Open the Kimono” – Basically means to reveal sensitive or confidential information; usually in the negotiation context. Example: “It’s going to come out in diligence and we don’t have the time to play games so we just need to open the kimono and take our chances.” I’m frankly amazed that this one is still in heavy circulation with the politically incorrect overtones, but I think I hear it at least once a week. Extra points when it’s accompanied by an illustrative hand gesture from a middle aged guy with a BMI of 30+.
“Agree to Disagree” – This is essentially just a polite version of “fuck you”; it functions as a segue to allow the negotiation or conversation to move on after hitting an impasse and where an actual “fuck you” would be unproductive. Example: “I think we just need to agree to disagree on this and move on.”
“We are in violent agreement” — Sort of a cousin to “agree to disagree” this is also a segue to move the conversation forward, but without the “fuck you” element – it’s more of an acknowledgment that people are missing each others’ points and don’t really disagree but are getting spun up.
“Spun Up” – Essentially, to get upset, irate, etc. In my experience, used predominately as a threat, i.e., “I could bring that point up with our side, but people are going to get spun up.” Can be used in tandem with various head related hyperboles such as “he’s so spun up his head is going to explode/pop off his shoulders/lift off” etc.
“It Is What It Is” – This is a handy phrase for the moment of resignation when it’s clear something can’t be changed. The issue has been fought, the other side won’t concede and you’ve got to accept the point and move on. “It is what it is.” Depending on your perspective it’s either a super trite cliché or a koan with real existential implications. Lastly, with the right intonation, it can also mean “fuck you.”
“At The End of The Day” – This phrase means something like “when all is said and done” and precedes some conclusion about an open discussion point. Example “At the end of the day, this is a small risk and shouldn’t stop us from doing the deal.” It can be used interchangeably with “the bottom line” or in a cliché combo such as “at the end of the day, it is what it is.”
“Is it the Horse or the Jockey” - The first time I heard this one was during a discussion of whether a high priced, highly recruited sales guy was getting the job done. After the discussion, one of the VC’s leaned in and said “We need to sort through these product issues before we can discover if the problem is the horse or the jockey.” I’m not sure if it’s the Woodside thing but equine metaphors in general are pretty popular in the valley.
“Horse Trade” – A “horse trade” is distinguishable from a reasoned negotiation point and typically made in some non linear fashion often at the tail end of a negotiation. A rational negotiation point might be a founder arguing for a smaller option pool increase because her hiring plan calls for only a modest headcount increase. A “horse trade” would be something like “Ok, we’ll drop the post money pool to 15% but we’re going to increase our participation cap from 2X to 3X.” One could say that a good horse trade is also a variation of “fuck you.”
“Sleeves Off Your Vest” – This one’s presumably been around since before the days of business casual. Giving someone the sleeves off your vest is a concession that doesn’t actually cost you anything. Its corollary among sartorial metaphors is the “belt and suspenders” – a purposely redundant addition to an agreement made to satisfy a paranoid party.
“Reach Out/Ping/Circle Back” – No one around here can just call someone. You have to “reach out” or “ping” them, etc. I’m not sure why this is the case but … it is what it is.
If you have the bandwidth, and I can get your mindshare – I’d love to hear other people’s favorites. Comment below!
Freemium is not a business model. It’s an effective go to market strategy. And for any SaaS startup filling their pipeline and setting revenue goals for 2010 — it’s imperative this is drilled into your marketing and sales teams’ DNA.
If you’re in Silicon Valley on Feb 18, join us for a Strategy Series Round Table event with SaaS sales veterans talking about new metrics to measure sales success. REGISTER!
Some excerpts from Lincoln’s paper:
“As part of a business model, Freemium has fundamental flaws. The most obvious flaw is that supporting a large base of nonpaying users that will never convert to paying customers can bleed an early stage startup of precious financial resources. In addition, these users can draw on the limited time and attention of the team, taking those resources away from development and support of the premium product that will sustain and grow the company.
While it is the “free” versions of software that get picked up in the blogosphere and social media (for a few minutes, at least), it is also the free products that get lampooned by those very same outlets, and the users, when problems occur. A small base of paying customers can keep both the overhead in check, but also the scale of the venture which the young startup must support.”
….
“Investment in lieu of revenue seems to be on many founders’ minds even when investment dollars have been harder to come by. Many startup founders seem to feel like it is easier to pitch investors than to go out and make sales. When this mindset is considered, it is easy to see how Freemium also became so popular with startups; especially those founded by technologists. It takes the pressure off of technical founders who just want to build a product and not worry about “selling.”
To ensure that a Freemium strategy is successful, and that the motivation to adopt the strategy is aligned with the vendor’s goals, a deep look at the market, the products, and the company is required.
Critical questions for SaaS vendors to ask themselves are:
• First the big one: If no one is willing to pay for our product right away, are we sure there is a market for it?
• Second big question: What is the quid pro quo? What is in this for us? Why should we let them use our system for free?
• Do we sign-up for free versions of applications and then stop using them or do we always move onto the premium version? Why?
• How can we monetize users even if they never “convert” to customers?
• How can the users of our system benefit our customers?
• Are our customers just those that pay to use the “premium” version of the system or might they be stand-alone consumers of the byproduct of system usage?
• Can we glean actionable market intelligence from both free users and customers?
• Can we aggregate the network effect data and monetize directly?
• Can we benefit from the “nothing attracts a crowd like a crowd” notion of having a large
number of users?
The following is a guest blog post by Matt Mickiewicz, co-founder of 99designs – a multi-million dollar design marketplace, and Flippa. Want to build a business on the cheap, and grow it to multi-millions in revenue? Matt is a jedi-master, so take heed….Below are some of his fave tools.
7 ESSENTIAL TOOLS FOR YOUR STARTUP COMPANY
Running a lean start-up is all about efficiency, and making the best use of low-cost or free tools available. Below I’ve highlighted some of my favourite “must bookmark” services that should be in every entrepreneurs toolbox.
1. Google Website Optimizer
You don’t know what you don’t know. Google Website Optimizer simplifies the process of testing your theories and hypotheses against real users using your site or service. Each new day brings new data and knowledge that you can employ to incrementally improve your business. You can also check out my friend Tim Ash’s book, Landing Page Optimizationfor tips on improving your site.
2. Mockingbird
Face it, you’re no designer. But as the founder or CEO of a startup, your role in product development is super-important. GoMockingbird.com is an intuitive, easy-to-use tool you can utilize to create wireframes and clickable prototypes, which you can then pass onto your designer.
3. UserTesting.com
You need feedback, and you need it pronto. Running a lean startup is all about moving quickly, and UserTesting.com allows you to run your website and apps against real users for just $29 per test. Furthermore, you receive feedback in as little as 24 hours. Use it!
4. UserVoice
Are you seeing a pattern yet? Successful startups are built on customer feedback. UserVoice is a great service that allows your customers to make suggestions and then vote on them. The strongest ideas rise to the top, ready for you to implement. Some of the best ideas at 99designs.com have come from our users — and best of all, implementing these ideas has lead to real bottom-line growth in our revenue.
5. Amazon Web Services and RightScale
Unless you already have racks of servers, you’re going to need to be able to scale your business quickly. After all, you never know when you’re going to land on the front page of the New York Times or Wall Street Journal! AWS and RightScale are super low-cost services that allow you to rent servers by the hour and data storage by the gigabyte. Without them, 99designs would be unable to archive over two million designs created by our design community. Check out Host Your Web Site in the Cloud — available for purchase on Amazon.com from January 2010.
6. DropBox
There is no easier way to share documents and files, period. Dropbox replaces your thumb drive and makes it easy to sync folders across computers and mobile devices. It’s much easier than emailing files back and forth as well. Three million users and counting attests to this!
7. AdWords
This is where most startups begin their media buying, because it’s cheap, easy to start with, and quick to optimize. AdWords allows you to quickly gain targeted traffic to your website while you work on your organic SEO. This enables you to start learning through Google Website Optimizer about what works and what doesn’t with actual site visitors. Best of all, by testing different ad copy, you can quickly determine which value propositions resonate the most with your prospects. You can then roll these into your landing pages, email marketing, PR efforts, and other channels.
Naval from VentureHacks today posted a great outline of how to pick a co-founder.
Now – this doesn’t mean there’s an ocean full of great potential co-founders swimming you can bait and hook. Finding a true Partner in Crime (in life, and in business) is hard. It takes a bit of serendipity and you need to be open while keeping your standards high.
As my Mom always said, “don’t settle for just anyone.” So true in Startupville, too.
Some soundbites: “Picking a co-founder is your most important decision. It’s more important than your product, market, and investors.
The ideal founding team is two individuals, with a history of working together, of similar age and financial standing, with mutual respect. One is good at building products and the other is good at selling them.”
The power of two: Two is the right number — avoid the three-body problem.
Pick someone you have history with. You wouldn’t marry someone you’d just met. Date first.
One builds, one sells.
Make sure your motives are aligned.
The magic combo: Look for intelligence, energy, and integrity.
Don’t settle.
Pick “nice” guys. Look for someone “irrationally ethical” (note: I love this – nice call, Naval.)
What you don’t know. Do they fill that gap?
Breakups are hard… End them quickly.
Check out VentureHacks here. If it’s not on your “must read” list. Add it – now.
Under the Radar Grad Circle company Tungle is a web application that tackles a core problem – finding a time to meet despite the multiplicity of calendars holding your availability hostage.
After kicking the tires on Tungle’s iphone app, here are a few things I like:
1. I can suggest multiple meeting times (brilliant!)
2. I can let colleagues see ‘free/busy’ blocks, which means I don’t have to justify 2 hours going for a run along the Embarcadero – I can just block off the time as ‘busy.’
3. Tungle works to untangle the mess of calendars where I store info – including MS Exchange, 2 Google/gmail accounts with separate calendars, and my laptop Apple iCal.
Get ready to see the company onstage November 19th – click here to take a quick video tour of how Tungle lets you sync your schedule across online calendars.
Under the Radar grad uTest, a network which outsources software testing using a global network of pros’ time and talent, today announced hitting 20,000+ testers in 157 countries. That’s a lot of testers, amigos.
uTest Homepage Screenshot
Developers and founders – If you don’t have the funds to hire a dedicated QA team, uTest may be a nifty solution to test your web, mobile, gaming and desktop applications.
Engineers, developers and app lovers (AKA uber early adopters) – If you’re interested in making some extra dough, consider signing up as a tester for uTest. Get the goods here.
Click here to read more, or watch the uTest pitch at Under the Radar here. it’s always nice to see a UTR alum growing!
In passionate pursuit of what’s happening in mobile tech, Twitter helps many of us act as ‘first responders.’
Over the last 3 months, the Dealmaker Media team has hacked through hundreds of mobile companies preparing for Under the Radar.
140 characters may not seem like a lot to work with, but tweets are an effective way to connect innovators with companies solving big problems on small screens.
Getting ready for #utr, we figured it’s time to share the goods. Here’s a short list of the people on Dealmaker’s Twitter radar…
Some are companies, some are individuals, some are developer programs, some are folks employed by organizations, some are analysts, some are bloggers, some are enthusiasts, some are Twitter arms of new media outlets, but all use their Twitter power for providing content value.
Here’s the list, with corresponding follower headcounts (current as of 3pm PDT today – follower counts may have changed since publication).
A quick disclaimer: Review the numbers with a grain of salt – I don’t consider follower numbers the primary indicator of a valuable Tweet. It’s more about what you tweet than how many people follow you…
Plusmo (Santa Clara, CA) an Under the Radar grad that built an easy to use multi-device mobile widgets development platform, has had a busy year. The company won top honors at multiple dev challenges, including the Nokia Developer Summit and the Nokia Hackathon.
Multi-platform Widgets Pay Off Big Time for Plusmo
Seems like the M&A situation may be heating up…AT&T snapped up Plusmo for an undisclosed amount, and will fold the tech into its Interactive division (which includes wireless dev efforts and will allow the firm to roll out apps like YPmobile – a mobile version of YELLOWPAGES.COM – across multiple handsets).
Looks like AT&T wanted an in house dev shop to reduce development time/$, and allow quick updates when new features are ready to roll. Perhaps most interesting is AT&Ts drive to be first with app and widget integration across mobile, TV, and web.
Check out the press release here. More at TechMeme here. Congrats to Aydin Senkut, the rest of Plusmo’s angel board, and the entire Plusmo team.
Hang with AT&T at Under the Radar this year – seems like carriers may be on the prowl for additional tech and talent acquisitions. It’s a good time to go mobile…
Kurt Daradics is a good friend of ours here at Dealmaker Media – and he’s certainly one of the best champions of the LA tech startup and social media scene. Waaayyyy back in the early part of this year he launched “Digital Family Reunion” a mixer event that toasted the who’s who in LA’s startup community.
And he’s at it again! If you’re in Los Angeles this Wednesday, join Kurt and all the members of the growing “digital family” as he calls it for a summit on community management. Use the Promo Code: DFR16 for a VIP price of $30.
DIGITAL FAMILY SUMMIT
Wednesday, September 23
Wokcano Restaurant, Santa Monica REGISTER for a VIP pass ($20 off) with promo code DFR16
You can find out more about the agenda and speakers here.
Under the Radar alumni, RunMyProcess (which presented at the Cloud-focused Under the Radar in April 2009) today announced they’ve been given the official thumbs up by Google.
“As of today RunMyProcess is officially a Google Enterprise Partner, providing the best workflow and integration solution for Google Apps and cloud based solutions in general.”
Matthieu Hug, CEO of RunMyProcess presented in front of a panel of judges at Under the Radar. Judges at the event included Matthew Glotzbach, Director of Product Management for Google Enterprise.
On Tuesday night three of the most prominent angel and seed-stage investors gathered in a boardroom errr, make shift living room, in San Francisco to discuss the state of angel investing today, from recent deals to what it’ll take to lay down a term sheet in the future.
The investors in the spotlight included Aydin Senkut, Founder and President of Felicis Ventures; Jeff Clavier, Softtech VC and Rob Hayes, Partner at First Round Capital – who despite the economy this past year still continue to invest.
In fact, Jeff Clavier delivered two term sheets that day alone. Seems creativity loves constraints; and the tight economy has weeded out the “me-too” entrepreneur wanna-be’s and left a crop of compelling, driven founders standing.
Hayes got the conversation rolling with a general observation. “This economy sucks!” Despite the downturn, he said, the three panelists, who frequently invest together, have been active. Hayes had 6 investments in the last quarter, Senkut had five with three follow-ons, and Jeff, with a kiddish smile, noted he had none in the past 28 days, but had put down two term sheets that day.
The good news is that the downturn has made selection easier. A year ago, most pitches were uninteresting derivative ideas (me-too Twitter knock offs). “All that’s left is nut crazy ideas,” Hayes exclaimed with satisfaction. The only entrepreneurs left seeking capital were the ones who believed in their ideas, regardless of the economy.
So what are they looking for? All generally invest in consumer Internet companies and have recently emphasized on personalized medicine and cloud-based ideas. The three invested together in a bio-informatics company not long ago. Senkut, who was an early customer in 23andMe, was the most emphatic about health–not pharmaceuticals, but things like electronic health records–and education.
Hayes noted the founder’s character and history was key. He was struck by the bio-informatics CEO’s ability to synthesize complex problems into simple stories that the three could grasp–and believed that ability would help drive the company’s success.
Read more here.
See you at the next Strategy Series (hosted by Mayfield Fund) on October 14.
I just received one of the cutest emails (did I ever think I’d say “cute” when referring to starting startups?).
Drue Kataoka is getting hitched this weekend, and instead of dooming guests to the aisles of Bed Bath and Beyond, they’ve asked for help funding their startup, Aboomba, through a startup registry.
Items include feeding developers, taking Tim Draper for lunch and oodles of Red Bull. Check it out.
Here’s the email and a video of the happy couple explaining their mission:
My fiance and I are launching a stealth-mode startup– and also getting married in five days at Stanford. So we created the world’s first “Startup Wedding Registry.” No crystal, flatware, or blenders here. Instead, we’ve invited our guests to feed an engineer for a day ($273), feed a VC lunch ($291) or provide lattes for a week ($129).
We created a tongue-in-cheek (but truthful) look at the toils of starting a Silicon Valley company, refracted through the prism of a wedding. We hope that it will involve and entertain not only our guests, but a larger web audience. We want to be open– anybody (not only our guests) is invited to suggest an item to add to the registry (through posting a comment).
The top 3 funniest (but real) suggestions will receive a 750 ml wine bottles of Au Bon Climat Pinot Noir (our wedding favor, which is custom-designed for the wedding), and will be specially featured.
…Now I just have to chime in here, Drue. Skip the lattes, girl. Go for drip coffee. Way cheaper and your future VC will appreciate the thriftiness!
Angel investors are the new black. In a down market, many entrepreneurs are looking to angels for salvation. But they may be in for a rude awakening. Angels are not exempt from economic pressures, and their outlook, strategies, and requirements are changing….
Last Wednesday at our Dealmaker LA event, Silicon Valley and SoCal angel and seed-stage investors (both large check writers and small) came together with LA entrepreneurs to hash out the true value of angel financing – and what’s changed due to last year’s econo-clypse.
Speakers Included:
Jarl Mohn, Investor
The Lowdown: Former CEO of Liberty Digital, Created E! Entertainment Television & the Style Network (CEO), former EVP & GM of MTV & VH1, and private investor.
Rob Hayes, Partner, First Round Capital
The Lowdown: Partner at the famed First Round Capital, the Bay Area firm that has provided seed-stage investments to some of the most well known startups, from RockYou to Mint.
Thomas McInerney, Angel Investor, TGM
The Lowdown: Former CEO of Guba who is based in L.A. and now spends his time advising and investing in internet startups like Shopflick and The Experience Project.
Scott Sangster, President, OrganicStartup
The Lowdown: Former Disney exec who runs OrganicStartup, a firm that invests in, advises, and incubates seed-stage internet startups in Southern California.
Moderator: Dan Gould, VP Technology Fox Interactive Media
Check out the pictures from last week; and be sure to join us September 17 at Rustic Canyon Partners for a Strategy Series focused on the Startup Exit Ecosystem – who’s buying, who’s not – and why. More Info.
We’re heading up to Vancouver on September 16 to hang with Bootup Labs (Danny Robinson and Boris Mann) and to meet some killer Canadian startups. Danny, Boris and crew are throwing another Launch Party that evening in partnership with our upcoming Under the Radar conference and you’re all invited!
We’re bring some friends from the Valley and look forward to rubbing elbows with techies and media addicts alike in the Vancouver.
LPV8 – Under the Launch Party
Wednesday, September 16, 2009 from 6:00 PM – 10:00 PM (PT)
Vancouver, British Columbia REGISTER!
“Launch Party Vancouver is back with a Valley spin. Our friends from Dealmaker Media who host Under the Radar will be in attendance to co-host the 8th installment of LPV. Under the Launch Party promises a great line-up of start-ups!”
Launch Party Vancouver is a lively mixer for the city’s brightest entrepreneurs, tech junkies, and bloggers, who are doing it, have done it or want to make their ideas happen here. The goal of the event is to connect the growing community of Internet and new media leaders with investors and other trailblazers across Canada and abroad.
See you there, eh!
And don’t forget – we’re still accepting nominations for mobile startups to present at Under the Radar in Mountain View, CA on November 19. Think you’ve got what it takes?
Our friend, Mark Suster (a partner at LA-based GRP Partners) is a successful entrepreneur and VC. I can always count on him for candid advice and feedback; a value he also provides to startups in SoCal and up here in the Valley. After being in a startup with an army of co-founders in my past life, I found Mark’s recent post quite compelling…
Founders, Ownership and Prenuptials
Yesterday I wrote a blog post (here) in which I urged people to not have too many founders.
Best case scenario in my mind is just 1, but at most I recommend 2.
I knew this topic would be controversial because when I tell people this in person it always elicits shock. To be clear – it’s not about being stingy with or hoarding equity – it’s about having a prenuptial agreement.
Let me give you some scenarios that do happen in real life:
You start a company 50/50 with a good friend. If it becomes the next YouTube, you always stay friends. 99.99% of companies do not become the next YouTube.
In fact, most go through tough times at some point. Or maybe it’s not a good friend but you’re a business guy and hooked up with a technical guy you know through the network and you think you’ll work well together or vice-versa.
If you’re not an overnight success or if you do struggle, what happens?
* What if one guy needs to pay bills and takes a full time job somewhere. Should he/she keep 50%?
* What if you have to make really tough calls on cutting costs, biz dev deals, fund raising and you violently disagree on direction? Who prevails?
* What if the person performs OK, but not great and you need to hire above him?
These situations are only compounded if you have 3 or more founders. I know that many people reading this will be in companies with 3+ founders and aren’t having any friction. That’s great. I have even invested in companies like this. I know conflict doesn’t always happen. It’s just that when it does, it usually comes after much time and expense.
Real world story:
A friend of mine used to work at Google. He started a company with 2 others. They agreed to all be co-founders.
Now, nearly 2 years of hard work have been put into the company (not to mention a lot of their savings) and they’ve had to have the discussion about who should be CEO. 2 of the 3 want the job. They each own 33%. There is no mechanism for deciding.
They agreed to let the VC’s decide once an investment comes in. That sucks because VCs will want to know that you have all the difficult stuff worked out before you come to them. You’re just giving the VC one more reason to potentially so “no.”
In many cases these things get worked out and I’m optimistic in my friend’s scenario. But… do you want to risk it AFTER you’ve sunk in years and hard-earned $$$?
Why does someone need to be CEO? In many businesses you end up needing to make tough decisions. Consensus does not always build.
In yesterday’s post; however, I didn’t advocate being greedy. To the contrary. I believe it’s very important to spread the equity. You should have a “partner” or 2 in the company. I believe you should treat them as partners. They should have access to all the same information. They should be involved deciding in all the difficult issues. They should have huge upside in the economic potential of your business.
But if you set up a company by yourself and give a large % in restricted stock or stock options to a partner, and for some reason you fall out of love, you have a pre-nuptial agreement in place.
If they stay 2 years and then leave – great. They only walk with half of their position. This could be achieved with simple vesting schemes, but there’s a rub… What if YOU decide that they need to leave? It’s far better in that case, as you’ll have some leverage that doesn’t end up torpedoing the company. 50/50 partnerships sometimes end with a bang.
There, I’ve said it. I know it’s controversial. But I still think it’s right for many a founder / entrepreneur. Yes, there are exceptions. No, it’s not the end of the world if you’re 50/50 or 33/33/33.
A friend and respected colleague, Bryce Benjamin (of TechCoast Angels) wrote to me after my last post. He was concerned that I had set the impression that founders should hoard their equity or that there were prescribed numbers to hand out. He authorized me to post his comments:
“We’re in sync on so many start-up/entrepreneur issues that I may have knee-jerked a bit too harshly on this one. But it is the “founding team” size and “percentage ownership” advice in this post that I feel you’re being too prescriptive about. After re-reading, I see you have qualified your comments, but one of the things readers really like about your blog is that you give specific, actionable advice in it and your qualifiers will be ignored just as I read right past them last night.
One of the mistakes I see entrepreneurs commonly making is too much focus on their ownership % and not enough recognition of the various core competencies and expertise they’ll actually need to create a successful biz. Generally a founder (or founding team) has strong core competencies in “a” discipline, but lacks the breadth needed to build the business. First time entrepreneurs, especially, tend to need more than one other “key” team member/partner to help them be successful. And to be able to attract the expertise/experience they require, they should be willing to give up pretty sizable chunks of the company. Experienced entrepreneurs who know the ropes won’t need the same kind of support and will be able to build a team by giving up less of the ownership.
In terms of %’s, my advice to entrepreneurs is to focus on value and fairness. I agree that “fairness” doesn’t always mean equal, but sometimes it does. Again, though, the key for the entrepreneur is to focus on what individual(s) is(are) essential to expanding the size of the pie and getting the right people, not specifically on the size of his or her piece.”
I agree 100%. I don’t advocate being stingy. I advocate, to steal Bryce’s words, “fairness and value.”
Many solo founders who’ve spent time with me would confirm that I often tell them, “you need to find a “co-founder” to work with if you want this to be successful. And you need to be prepared to part with 10, 20, 30% of your company or more to make this happen.”
This week, Ivan Gaviria walks us through the 5 mistakes startups make with their people… A mistake a day.
Ivan is a partner at Gunderson Dettmer’s Silicon Valley office, practicing in the Corporate and Securities Group. He has extensive experience working with startup and emerging growth companies through their entire lifecycle as well as representing venture capital, private equity and other investors.
MISTAKE #5 OF 5:
Ignoring Internal Revenue Code §409A
One last tax code reference – Section 409A.
By now, most in the startup community have heard of this 2004 amendment to the tax code ostensibly designed to address pension plan and deferred compensation abuses post-Enron but chock full of unintended consequences.
It’s a complex set of rules with lengthy regulations. I’ll just point out two key areas to watch out for 409A:
First, 409A imposes some nasty tax penalties on taxpayers who receive discounted options (options with a strike price less than fair market value).
The introduction of this element of 409A has dramatically changed the practices of private start up company boards who historically had priced options using their business judgment and some simple rules of thumb based on discounts from the most recent preferred stock price.
Section 409A recognizes the burden placed on private companies who can’t just look to the ticker to confirm the appropriate stock price and adopted a number of safe harbors that Board’s can rely on in their pricing decisions.
For the startup founder, it’s important to understand the safe harbors and to be mindful of 409A anytime options are being priced.
Second, 409A doesn’t just impact options. The regulations pick up a number of kinds of “deferred compensation” and companies can inadvertently fall into 409A problems when structuring everything from earn outs to severance packages and salary deferrals and carve out plans. As with many of the issues above, seemingly small problems can cause significant cost and delay when they have to be solved under the scrutiny of an acquiring company’s accountants and counsel.
ABOUT GUNDERSON DETTMER: Gunderson Dettmer is a leading law firm for entrepreneurs, emerging growth companies and the venture capital firms that support them. With 125 lawyers in four offices – Silicon Valley, Boston, New York, and San Diego – we represent companies in every stage of development from incorporation through entry into public markets and beyond. We provide counsel on general corporate and securities law, mergers and acquisitions, venture capital services, intellectual property, strategic alliances, and tax matters. We combine our experience, industry relationships and expertise to provide practical, business-oriented advice tailored to the needs of the emerging growth company marketplace.
—-
Information in this post relating to the tax treatment of a taxpayer and/or the tax consequences of one or more transactions (collectively, the “Tax Information”), if any, is not intended to be, and cannot be, used by any direct or indirect recipient of this post to avoid any penalties that may be imposed on such direct or indirect recipient. Additionally, such Tax Information, if any, may have been written to support the promotion or marketing of the transactions addressed in this message. The tax consequences of entering into such transaction(s) will vary depending on the taxpayer’s specific circumstances; accordingly, the direct and indirect recipients of this electronic message should consult their own independent tax advisor with respect to the tax consequences of entering into the transactions discussed herein.
This week, Ivan Gaviria walks us through the 5 mistakes startups make with their people… A mistake a day.
Ivan is a partner at Gunderson Dettmer’s Silicon Valley office, practicing in the Corporate and Securities Group. He has extensive experience working with startup and emerging growth companies through their entire lifecycle as well as representing venture capital, private equity and other investors.
MISTAKE #4 OF 5:
Failing to File Those 83(b) Elections
Without getting too deep in the weeds, an 83(b) election refers to a tax code section that allows the taxpayer to make an election on when to pay taxes in connection with the acquisition of certain kinds of stock.
Founders in a typical startup will acquire their stock subject to vesting – if they leave the company, the unvested portion of the stock can be repurchased by the Company at cost, or at the lesser of cost or the then current fair market value of the stock. That repurchase right is the key element for 83(b) purposes.
A founder who makes the 83(b) election is electing to measure the tax consequences of the purchase at the time of the purchase. Failing to make the election means that the tax consequences are measured at every vesting date during the entire vesting period.
Since the tax is on the spread between the fair market value of the stock and the price paid, so long as fair market value is paid at the outset, there will be no spread at the time of the election and no tax on that acquisition (there will of course be tax on the gain when the stock is eventually sold).
The big “gotcha” in failing to make the election is that the fair value is reassessed at each vesting period and it can change dramatically during the typical 4 year vesting period.
When you imagine that a typical startup where founders’ stock that is purchased for fractions of a penny can conceivably go through several rounds of financing and even an exit or IPO during the standard 4 year vesting period, the tax consequences of that ever increasing spread between fair market value and the original purchase price can get really ugly.
83(b) elections have the added issue that the election must be made within thirty days of acquiring the stock or it is missed. There are no second chances or ways around the deadline.
ABOUT GUNDERSON DETTMER: Gunderson Dettmer is a leading law firm for entrepreneurs, emerging growth companies and the venture capital firms that support them. With 125 lawyers in four offices – Silicon Valley, Boston, New York, and San Diego – we represent companies in every stage of development from incorporation through entry into public markets and beyond. We provide counsel on general corporate and securities law, mergers and acquisitions, venture capital services, intellectual property, strategic alliances, and tax matters. We combine our experience, industry relationships and expertise to provide practical, business-oriented advice tailored to the needs of the emerging growth company marketplace.
—-
Information in this post relating to the tax treatment of a taxpayer and/or the tax consequences of one or more transactions (collectively, the “Tax Information”), if any, is not intended to be, and cannot be, used by any direct or indirect recipient of this post to avoid any penalties that may be imposed on such direct or indirect recipient. Additionally, such Tax Information, if any, may have been written to support the promotion or marketing of the transactions addressed in this message. The tax consequences of entering into such transaction(s) will vary depending on the taxpayer’s specific circumstances; accordingly, the direct and indirect recipients of this electronic message should consult their own independent tax advisor with respect to the tax consequences of entering into the transactions discussed herein.
This week, Ivan Gaviria walks us through the 5 mistakes startups make with their people… A mistake a day.
Ivan is a partner at Gunderson Dettmer’s Silicon Valley office, practicing in the Corporate and Securities Group. He has extensive experience working with startup and emerging growth companies through their entire lifecycle as well as representing venture capital, private equity and other investors.
MISTAKE #3 OF 5:
Employees versus Independent Contractors
As a related matter to yesterday’s post about employee wages, founders in their new role as an employer need to also be aware of the distinction between employees and independent contractors/consultants.
Often, early stage companies will seek to characterize an individual as a consultant to avoid wage issues. Unfortunately it is not as simple as calling someone a consultant and giving them a consultant agreement.
If the characterization is challenged, the relevant test is highly fact-specific and looks at questions like whether the individual works for multiple firms, sets his/her own schedule, is obligated to comply with company policies, has to personally provide the services, offers his/her services to the general public, etc. In short, if the individual acts like an employee, they may well be an employee.
The risk, of course, is that in characterizing an individual as an independent contractor, the company does not issue a W-2 and does not take income tax withholding or pay the employer portion of taxes like social security and disability.
If the individual is found to have been an employee, the Company will be on the hook for the failure to withhold and there can be late penalties and interest as well.
In addition, you can find yourself right back in the position of having an overhang of potential claims for unpaid wages, overtime and other benefits.
Again, this is an area where startups need to be thoughtful about how they manage the issues. Always keep in mind that the risk averse public companies who may potential buyers may take a sharply different view of what level of audit risk is acceptable. Getting good advice on these matters from professionals who have “seen the movie before” is essential.
ABOUT GUNDERSON DETTMER: Gunderson Dettmer is a leading law firm for entrepreneurs, emerging growth companies and the venture capital firms that support them. With 125 lawyers in four offices – Silicon Valley, Boston, New York, and San Diego – we represent companies in every stage of development from incorporation through entry into public markets and beyond. We provide counsel on general corporate and securities law, mergers and acquisitions, venture capital services, intellectual property, strategic alliances, and tax matters. We combine our experience, industry relationships and expertise to provide practical, business-oriented advice tailored to the needs of the emerging growth company marketplace.
This week, Ivan Gaviria walks us through the 5 mistakes startups make with their people… A mistake a day.
Ivan is a partner at Gunderson Dettmer’s Silicon Valley office, practicing in the Corporate and Securities Group. He has extensive experience working with startup and emerging growth companies through their entire lifecycle as well as representing venture capital, private equity and other investors.
MISTAKE #1 OF 5: Not understanding obligations to prior employers.
Anyone who has been around the start up business knows that it’s a much smaller community than it initially appears.
Most people in the business will be involved with several startups over the course of a career and top managers like to bring their teams with them to new opportunities.
With all that moving around, there are inevitably issues with former employers that can range from minor irritations to full blown litigation; especially when the ex employee is perceived to be doing something competitive at their new gig.
The key to avoiding problems in this area is all about timing – look at the issues BEFORE you start coding! While California law is relatively favorable to employees when it comes to these matters, employers are not without protection; especially with respect to intellectual property.
If you’re dusting off that invention assignment agreement from your old company to read the fine print AFTER getting the “nastygram” from your prior employer it may be too late for a course correction.
Before you or anyone else starts working on your new company, you should be asking:
* Is he/she still working for someone else?
* Is there any relationship between the business and technology of that former employer and what you propose to do?
* Does that person have any non-solicit or non-compete obligations?
* Has there been an analysis of whether the work the person will be doing will entail their using proprietary information that belongs to a prior employer?
If any of these questions raise red flags, get qualified advice on these issues and be prepared to alter your plans if necessary.
The key is to preserve your ability to make changes or adjustments before you start down a path. The cost of a mistake in this area can be huge as a material dispute over IP ownership can literally render a company unfinanceable.
ABOUT GUNDERSON DETTMER: Gunderson Dettmer is a leading law firm for entrepreneurs, emerging growth companies and the venture capital firms that support them. With 125 lawyers in four offices – Silicon Valley, Boston, New York, and San Diego – we represent companies in every stage of development from incorporation through entry into public markets and beyond. We provide counsel on general corporate and securities law, mergers and acquisitions, venture capital services, intellectual property, strategic alliances, and tax matters. We combine our experience, industry relationships and expertise to provide practical, business-oriented advice tailored to the needs of the emerging growth company marketplace.
Tuck your ego, aside, guys. Success doesn’t mean being first – it means being better and being relevant.
Skipping the “slow and steady wins the race” lecture, it’s important for startups today to remember that a successful entrepreneur is one if sees a need and fills it.
Yesterday, on a call with a prominent Silicon Valley investor I was reminded about the importance of doing things better, rather than doing things first. “I invest in companies who’ve done the due diligence to find a growing market and offer them a better solution than they currently have by identifying gaps in competitors’ offerings then rolling up their sleeves to become the King of that space.”
The MySpace re-birth continues! Congratulations to our friend Mike Macadaan who today, officially starts his new role as VP of Product at MySpace.
He spent the last 10 months at Tsavo Media working with founder, Mike Jones who recently took over as COO of MySpace. Mike is on a role recruiting the best-of-the best for his new team, I wonder who’s next, maybe Sean Percival?
Can’t wait to watch the transformation at MySpace begin. Best of luck guys!
YuMe, who presented at one of our past Under the Radar: Entertainment & Media conferences in 2007 recently raised $2.9 million of a $4.5 million round of equity.
About YuMe
YuMe is the leading video ad management platform and the largest dedicated video advertising network, offering solutions that give publishers maximum control and advertisers premium reach.
Since presenting at Under the Radar, 54% of startups have gone on to raise funds or be acquired. Are you still Under the Radar? Apply to present at our next event Under the Radar Mobility or register to attend to be the first to see the next wave of disruptive founders.
Imagine being Jimmy Wales in 2001 and selling the idea of an online encyclopedia written by, well, anyone.
Regardless of how accustomed we are to today’s truly participatory web, much of the culture of collaboration we experience today was sparked by Jimmy’s push to launch an edit-able, community driven collection of information more vast than any shelf-full of hard cover Encyclopedia Britannicas.
Andrew intro’s his conversation with Jimmy Wales with a quote I love: “how do you get people to care about something before it’s something?” Wikipedia’s contributors and editors are a passionate community – and though some posts and edits have been debated, the ability for passionate experts to post information for public consumption and continuous updating is truly amazing.
If you’re embarking on an online movement of your own, creating a community-driven initiative, or simply trying to understand what incentives it requires to fuel crowdsourced projects or user-generated content – this is a must watch.
Andrew Warner Interviews Jimmy Wales, Founder of Wikipedia:
About Andrew Warner: Andrew is an entrepreneur and the brain behind Mixergy. He continues to nab terrific interviews with some of the best entrepreneurial minds and success stories out there – and asks them very pointed questions about how they did what they did so people like you and I can learn from others’ experiences.
The following is a blog re-post from Raj Kapoor’s , Managing Director at Sillicon Valley’s Mayfield Fund. Raj is an energetic type A personality that likes to explore, learn, question, and enjoy. The original can be found here. Contact Mayfield Fund here. Thanks Raj!
PREDICTION: Social Networks Will Make More Money Off Site vs On
by Raj Kapoor.
Social networks are here to stay…100s of millions of consumers now use them as an indispensible tool to stay current with friends and interests. There has been a lot of debate on how they can make money. Let’s keep in mind that they ARE making money today (facebook over $300M annual revenue and LinkedIn well over $100M) – more than most internet sites – but just not a lot on a per-user basis.
I believe this is because the traditional ad model doesn’t work well here – social networks are a communications platform at the core.
People log on daily to check messages, photos, and videos that were added by interesting people for them to view. They are not coming to view content as much as people would have hoped, nor are they using it as a main portal or launching point for all web activities (Google won that so far…)
Communications sites have never monetized well because the consumer is focused on communication and is not going to be diverted by ads.
I experienced this firsthand running Snapfish and trying ad sales for 6 years against online personal photo pages. We got advertising up to 10% of revenue but that was about it.
Why? Lack of performance and attention from users… they were too busy viewing photos vs clicking on ads. Many social networks suffer the same issues as shown by their dismal click thru rates.
THE DATA ECONOMY:
That said, I do believe there’s a big opportunity – it’s in the Data that is captured explicitly (entering info on yourself in your profile) and implicitly (the groups you join, the content of the messages you send each other). In some social nets like Facebook and LinkedIn, the data is very deep and for the most part true. The profile page itself is a treasure trove of information on age, gender, location, interests, work experience, favorite movies, tv, etc – all the attributes a great brand marketer wants to target when reaching an audience.
The advertiser may not have measurable success reaching the user in the social network, but if they had access to the data when the user is on other sites – more conducive to engagement with ads – the advertiser would be in nirvana.
The data economy is developing fast where data is decoupled from ad inventory and used to target audiences where ever they are (Mayfield companies Audience Science, Adchemy, and Rubicon Project are leading the charge here). I think the big social networks are aware of this but are treading carefully given the privacy concerns. I do believe when they find the right mix of user privacy and sharing of this data, they can provide it to advertisers, networks, and publishers and profit handsomely from it. They can make more money on a user by charging a tax for the data each time its used vs the pageviews from that user on their site.
Let’s do the math and make some assumptions to illustrate:
I used the following estimates on ad impressions/user/mo on top social networks:
- Facebook: 356
- Tagged: 387
- Myspace: 452
….Avg: 403
…And I assume $.50 as the assumption for eCPM (which I believe maybe high). Thus, on average a social network makes $.20 per user per month on ads on their site.
USING SOCIAL NETWORK DATA TO MAKE MONEY OUTSIDE THE SOCIAL NETWORK
Now, let’s look at how many ad impressions the typical internet user encounters in a month – I’ve found it to be about 1,650 per month. Let’s also assume the following:
- 50% of these impressions could be targeted using the vast amounts of profile and friend data from SNS
- $2 eCPM for such a data targeted ad
- the social network keeps 15% of this revenue for its data (which seems like the going rate talking to data players).
That’s about $.25 per user per month. So, if my assumptions hold true, then a social network can monetize their users $.25 offsite vs $.20 onsite….
Social networks will make money on their site – thru ads, virtual goods, etc – but the real big opportunity is freeing all the user data and enabling it to target them wherever they are on the web.
Over at TechCrunch, Sarah Lacy just posted an interesting research tidbit:
“…Regular sex can make you a better worker bee. The dopamine rush from sex improves creativity making you a better problem solver. A boost of oxytocin and vasopressin generate feelings of trust, making you more likely to be a team player. And, a boost in testosterone can make you more confident and competitive.”
Sounds to me like if you want your business to succeed, then both you and your co-workers should be getting a regular dose of Love Potion #9.
