Scott Weiss, a partner at Andreessen Horowitz, has an excellent post up on GigaOm titled The CEO’s Weekly Checklist. I’ve gotten to know Scott over the past few years via the board of Return Path. Scott was co-founder/CEO of IronPort (acquired by Cisco) and built a very significant and powerful company – his checklist comes from his experience growing as CEO from the beginning of IronPoint to an over $100 million company.
Question: Most VCs commented that they can not fund current cap table where the CEO and COO would get 10% equity once fully vested while the current investors have 80%. We talked to our investors and they have agreed to rework the cap table, however, I would like to understand from you what should I change my cap table to?
More Context: I recently joined a very early stage company as their CEO. The company was founded by two people three years back who have funded it since inception to the tune of ~$200k out of which $60k is in loans and is on the books of the company. The rest of $140k are unbilled expenses. The company has ~1000 paying customers and in 3 years has earned ~$160k. Last years revenue was $52k. The company is still burning money to the tune of $24000 per annum. I am not taking a salary right now, but my salary (at 80% discount to my market salary) is getting accrued since January. Also, I have been offered 10% equity with 4 year vesting and 1 year cliff. At this point of time we are trying to raise ~300k at 2.4 mn pre money. Most VCs in India say we are too early stage for them and we have just started looking at angel investment as an option.
This is a tricky one because it’s not clear whether the two original founders are still active in the business. If they are, then the hired CEO and COO getting 10% equity each is probably not unreasonable given that the founders are separate from the investors. In the case where the founders are also the early investors, this doesn’t matter, as you can separate their contribution conceptually.
If the early founders are no longer involved in the company and you are effectively restarting the business, then this feels light given this stage. However, there is no standard situation. It ultimately a negotiation with the founders and with your new investors. It’s easy for an investor to say “this doesn’t work for me” – a logical response, if you believe they are interested, is “what works for you?” Basically, have them propose something and then work with the founders to see if you can get to a deal.
There are definitely cases where the early investors own too much of the company to make it fundable. For example, let’s assume the the early investors put up $200k cash for 80% of the company. These investors are not active in the company, but instead you and your COO are running it (from day 1). In that case, a new investor would look at it and say that the early investors ended up with too much of the company since they effectively got 80% for investing a mere $200k.
Finally, if you raise money, you should use the event to clean up the existing balance sheet. If you raise $300k, you don’t want the $60k loan outstanding (it should probably convert into equity) and you definitely don’t want the $160k of unbilled expenses hanging out there. In addition, your accrued salary shouldn’t be continuing to accrue or get paid out. One tool you can use to normalize the equity some would be to roll the existing $200k into the ownership that the founders have (e.g. they still have 80% but now have a cost basis of $200k and the loan + the unbilled expenses go away) and then you pick up additional equity associated with converting your deferred salary into equity (e.g. if you defer $135k over the year, you get another 5% in options post financing ($135k / $2.7m post)).
Today’s VC post is from Roger Ehrenberg (IA Ventures) titled Letting Go. Roger makes a strong set of points about how a founder/CEO needs to learn how to let go. I have a specific nuance that I see often where I think VCs regularly screw up that I bring up in the comments. I’d encourage you to go take a look and weigh in on the comments – this is a good and important one.
There are two runner up posts – Primum Non Nocere from Fred Wilson (USV) and How to Create an Early-Stage Pitch Deck from Ryan Spoon (Polaris). Both good extra food for thought on this wild card weekend.
Oopsie – we forgot to do the “best VC post of the day” for the last month or two. You might have thought there weren’t any great VC posts, but you’d be wrong. We were just being lazy. As with all good things that start up again on January 1st, we’ll try to get back in the “best VC post of the day” groove.
There weren’t many on 1/1/12 so Firas Raouf’s (Openview) titled What Made Alex Ferguson a Great Manager stood out amidst the silence of the morning of the new year. I didn’t know who Alex Ferguson was until I read the post; he’s the “manager” (CEO) of Manchester United and has been since 1986. Firas summarizes Ferguson’s management principles, as they apply to a CEO of an early stage company.
- Identify yourself with your company brand
- Cultivate every interest group in your company
- Gather information everywhere
- Seek total control, but recognize when you cannot have it
- Don’t let others cause you stress
- Remember that crises blow over
- Always be unsatisfied
Go read What Made Alex Ferguson a Great Manager to get the bullet points for what’s behind this post. Happy new year Firas!