Month: October 2007

Oct 29 2007

How Good Angel Groups Work

David Cohen – the ringleader of TechStars – has a good post up titled Thoughts from the west out east, and vice versaLast week David was a guest speaker at the Northeast Regional Investor Conference held in Portsmouth, NH.  In addition to running TechStars, David is an active angel investor in Colorado and had a very interesting reaction to the way “better angel groups – both east and west coast – worked.”

“One thing that I heard repeatedly today from the better angel groups (east and west) is that every single deal that is presented to their group is sponsored by one of their members. That member introduces the deal before the pitch. I got to see 3 “quick pitch” deals today and they were all high in quality. They were effectively introduced by the sponsor angel. If the deals weren’t good, that angel would look bad for bringing the deal to the group. Social pressure was at work naturally and effectively because of this simple rule. No screening committees, application fees, etc. Just go impress a member angel. We should be able to learn from these best practices in Colorado, but we haven’t. Both Kieretsu and CTEK require applications, payment of fees, and artificial screening processes. Just make them get to and impress an active angel who is a respected member of the group. Much cheaper, no fees required, and good dealflow. If they can’t find and impress just one angel enough to get there, there’s a 99% chance they shouldn’t be there anyway. I continue to hope we see this sort of model adopted with Colorado’s angel groups. It’s certainly the way many of the very high quality angel deals get done outside of those groups already.”

Read the rest of the post for what David found offensive and then – on second thought realized was correct.

Oct 22 2007

Eek – A Competitor Just Raised $50 Million – Now What?

Today’s great post(s) come from Ken Gaebler and are titled My Competitor Raised $50 Million – Great! and conversely My Competitor Raised $50 Million – Yikes!  Ken did a nice job of being both an optimist and a pessimist around the issue – and addresses a bunch of the opportunities and concerns that ensue.

Oct 19 2007

Places to Find Developers in Exchange for Sweat Equity

Question: I am in the process of getting my startup venture off the ground and have run into a slight road block.  I have developed the business case, and fleshed out the product requirements, but need a strong developer to the product.  Problem is, I have not gotten any funding yet, therefore cannot pay someone to build it.  Any suggestions on places to look for developers who are willing to put in sweat equity in return for ownership in the business?

A (Brad): While finding a developer to work for sweat equity is an option, I’d assert that you’d be better served by hunting for a technical co-founder that is passionate about creating the company you envision.  In my experience, it’s naive to think you can just “get developers to build the product” although it does sometimes work. Most of the great software startups that I’ve been involved in have at least one technical co-founder (and many have more than one.)

Regardless of the path you go down, you want to recruit quality.  If you have no cash to offer someone, be prepared to give up a meaningful amount of equity.  There’s no easy formula that translates between hourly work and equity ownership, especially in a raw startup, but be ready to have a thoughtful discussion with whomever you recruit.

If you aren’t willing to go the technical co-founder route, the best place to search is at your nearest college with a strong computer science department, especially if it is a school with a culture of entrepreneurship.

Oct 16 2007

How Much Equity Should an Early Stage COO/CFO Get?

Q: We are a virtual company that will operate very lean. I am hiring a COO/CFO at the moment, and am wondering what share grant would be appropriate. I have seen CEOs recruited into startups receive something like 5%. Are there rules of thumb?

A (Brad): We’ve got plenty of posts around this general topic in the Compensation archive.  The most specific one is titled What are typical compensation numbers? although it doesn’t really address the direct question.

Every situation is different, but a non-founder COO/CFO recruited early into a startup (say – pre-financing) will usually get options for between 1% and 5% of the company.  COO’s tend to get more than CFO’s – although at the very early stage I’d assert that the same person should be able to do both jobs (which seems to be implied by the question.)  If this is the case, I’d err on the high side.

As part of this, I’d be very focused on vesting.  We cover this in Equity Compensation Terms and on Feld Thoughts in Term Sheet – Vesting.  When you hire someone on early in a startup, you want to be obsessed about making sure their stock / options have vesting terms on them in case they do not work out and you have to fire them.  This is especially important in situations where you hire on someone into an early stage COO or CFO position – while everyone hopes things will work out, they often don’t.

Oct 16 2007

The Next 20 Hires

I love it when Dick Costolo fires up his virtual pen and lets the words flow.  Today’s post titled Too Many Chiefs of Too Many Indians (a total of 1,218 words) is an excellent treatise on who to hire early in the life of your company.  More specifically, it answers the questions “should I hire experienced people or junior dudes” and “if I hire experienced people, what kind should I hire.”  I guess Dick isn’t a Red Sox fan given the Chiefs and Indians theme.

Oct 14 2007

The Role of an Early Stage Board of Directors

I have 57 unanswered questions in my “AsktheVC” folder.  There are 77 days left in 2007.  That’s less than one a day.  I should be able to get the folder to 0 by the end of 2007.  Nothing like a little goal.  Of course, that assumes no new questions which you – fair reader – would probably assert is a bad assumption.  Oh well. 

Q: For a very early stage company (pre-funding), what role should the board of directors play?

A: (Brad).  We’ve written about this a lot in the past.  See the Board of Directors category on AsktheVC, the Board of Directors category on Feld Thoughts, and an article I wrote in the late 1990’s titled Boards That Are Not Bored

Your early stage board can cover a wide variety of roles, but fundamentally you want them to be strong advocates and support for what you are doing and what you are trying to create.  They will help you with fundraising, recruiting, strategy, early founder issues, business partnerships, and a variety of other tactical things. 

While there is a governance role with every board, the founders of an early stage company should not simply defer to the board.  In all cases the founders should also be members of the board and collectively should view the board as a constructive group that is working together, rather than one where there are two separate entities (e.g. “the board” and “the founders”).  In addition, the “board” shouldn’t be anthropomorphized (as in “the board wants me to do this”) – your early stage board consists of people that each likely have a point of view, will contribute, but shouldn’t “dictate.”

I went back and reread Boards That Are Not Bored and continue to think it’s one of the better articles I’ve ever written about boards.  The construct of a Working Board still resonates with me, especially for a very early stage company.

These are boards that role up their sleeves and help the founders and management team of the company get the job done. They meet frequently, have animated, engaged discussions, and offer significant ongoing support and help to the key owners and managers of the company.

As a company grows and takes funding, these dynamics will change.  A post funding board is different than a very early stage / pre-funding board.  Both can be powerful, have huge impact (positive and negative), and are important.  But – they are different.

56 to go.

Oct 14 2007

How Can An Entrepreneur Fundraise Without Getting In Trouble With the SEC?

Q:  If an entrepreneur is out meeting with people in order to find investors in a round of financing, is this “soliciting” investments in the eyes of the SEC? 

It is my understanding that the SEC doesn’t permit solicitations” unless there is a pre-existing relationship.  Therefore, if the entrepreneur doesn’t have a pre-existing relationship before he starts making the rounds looking for financing, he could be in trouble. 

I have a colleague who say that this is not a problem.  He said that it would be ok for the entrepreneur to hold these meetings–and even to use a “finder” to expand his network– as long as he wasn’t giving the prospective investors a private placement memorandum or suggested term sheet.  As long as the prospective investor comes back with a term sheet, he is not involved in an offering or “soliciting” an investment is, my friend’s logic.

A:  (Jason)  There is a simple legal answer to your question: this type of behavior that you and your colleague are discussing is an illegal solicitation under the law.  Note, that I’m assuming that people you are contacting are not accredited investors.  If the people that you are contacting are not accredited investors, you don’t have an exemption under the SEC’s interpretation of the law.  It’s irrelevant whether or not you have a pre-existing relationship with anyone and irrelevant whether or not you have a PPM or term sheet present in the discussion.  Your intent is to solicit investment and that’s sufficient to be considered an offering. 

Now if you are seeking venture financing, or angel investors, they should all be accredited and you have no issues.  If you are asking folks who don’t fall under this standard, then the question is whether or not the SEC will notice your activities.  Probably not.  You would most likely fall under the radar, but the biggest issue is that any money you take in would probably be subject to a right of rescission – in other words, any investor you take on would at any time be able to change his / her mind and take their money back. 

All of this, too applies to any finder you use.  Using a finder does not insulate you from any of these problems. 

**Per all posts on this blog regarding legal advice, we aren’t your lawyers – seek your own counsel.  **

Oct 9 2007

Getting To No – Quickly

Don Dodge has today’s great post up titled Failing Fast It’s a good thing.  Don’s a smart guy, an experienced entrepreneur, and has become a good friend.  His blog – Don Dodge on The Next Big Thing – is required reading for entrepreneurs, especially if you have any interactions with Microsoft.

Oct 4 2007

When A VC Says “I Need 20% Of The Company”

Today’s great post is from Fred Wilson titled The Fiction of 20%If you’ve ever negotiated with a VC, you’ve likely heard something like “I need at least 20% of the company to make the deal work.”  Fred has a great rant on why this is – is in his words – rubbish. 

Oct 2 2007

Great Book on Legal Issues Affecting Entrepreneurs

We get a ton of legal questions on this site.  We can’t answer them because if we act as your lawyers, you can sue us.  That would not be fun.  However, fear not, there is a GREAT book on most all of the issues that affect the entrepreneur.  The Entrepreneurs Guide to Business Law.  The book’s co-author is Craig Dauchy from Cooley Godward Kronish and along with his accomplice Constance Bagley from Harvard, they’ve written what I consider to the be the definitive treatise on the subject.  I love my first and second edition copies, have them on my desk and still refer to them often.  This is an easy read, but very rich in content. 

If you are an first-timer or seasoned veteran, read this book.  I guarantee at a minimum you’ll be a better consumer of legal services and save yourself time and money.