Book Review: Be Smarter than your Lawyer and Venture Capitialist

I won't spent to long on this, but if you are the CEO of an early stage startup, I would highly recommend reading: Be Smarter than your Lawyer and Venture Capitialist by Brad Feld and Jason Mendelson.  They go through a platonic term sheet with very practical explanations and commentary.  Once you start down the financing path and someone says they want participating preferred, you don't want your response to be a Donald Trumpian:"I know what that is, but give me more."  You want to have a thought out, principled, response.  Well worth educating yourself on the more common "Gotcha's."

When you raise money and plan to do some PR...

You are supposed to file a Reg d with the SEC.  Even a private raise should be filed.  Some companies ignore this requirement, but it seems pretty easy to comply and, I think, shows that you know what you are doing.  Which is to say, I am thinking about PR.

Payroll

One of the big hassles of starting up a company is the whole payroll thing.  Getting paid is good.  Getting people paid is not as good.  Tons of various agencies you have to register with.  My sense of it is that if the government wanted to encourage new company formation, they would drastically simply the process for new companies.  Of course, that complexity has led to an eco-system that handles payroll and the various forms.  We use Paychex.  They have made things much easier.

Refining our pitch deck

I came across Pitch Envy.  They keep a library of pitch decks and highlight what was good about the deck and what needed work.  Great resource.

Tools and techniques for starting up a company via Thoughbot

I have been asking around about design firms.  One of the folks in my network came back with a link to the ThoughtBot playbook.  Thoughbot is a design and development consultancy, but run by very tech savvy folks.  If you are thinking about starting a tech startup, I would encourage you to read the ENTIRE playbook.  I love that they have structured their business processes on modern services.  There is a lot to like and to learn from reading the playbook.

Linkedin for Startups - Gust

Just discovered Gust.com.  It is a social network for start-ups and investors.  I am just starting with it, but it has, I guess I'll call it "funding workflow" functionality.  You can use it to not only develop a presence in a relevant social network, but can use the site to exchange documents with potential investors.  Looks good.

What Every Angel Investor Wants you to Know

Just finished "What Every Angel Investor Wants you to Know" by Brian Cohen and John Kador.   I have mixed reactions to this one, but I think it is a must read.  The author is a well known angel investor and he has good wisdom on how he thinks about evaluating a start-up.  In my, admittedly, limited experience, I would take his advice as a data point, but not as roadmap.  He helps shine a light on the process of angel investing and provides a lot of detail that will help a new company prepare for the process.  But don't confuse successful funding round with a successful company.  Financing is fuel.  You still need to tend the fire.

Hard Thing about Hard Things

The current book list is pretty analytics focused, but I have ben reading some of the startup books that folks recommend.  First one:  Joe Zawadzki (founder of x+1 and MediaMath) called out "The Hard Thing about Hard Things" by Ben Horowitz.  Ben is a founder in the VC firm  Andreessen/Horowitz.  He was the CEO of LoudCloud and Opsware and has great experience building big companies, relatively quickly.  

I liked the book, but Ben has a perspective that is obviously driven from his experience.  And  Ben's experiences are a bit rarified.  He was running B2B infrastructure companies and talks about needing to raise (and then spend) $100MM to ramp the businesses.  Also, he had enviable advisors.  Micheal Orvitz, Bill Campbell to name drop a two.  But he also had to deal with serious threats to the business.  Regardless, I would recommend the read.  Short version, don't give up.  There are going to be very hard times.  As a CEO you need to be prepared for the hard times.  He leaves the "how" as an exercise for the reader (I think he would say that every situation is different and you need to find your own path for your particular hardship), but the book provides plenty of food for thought.

I will also say that this is the only business book I have read twice.  I aspire to build not just a company, but a team, as influential as Ben.  I have promised myself that when we hit 50MM in revenue, I will read it again.  And I read Ben's blog.  He just did a piece on "The Prophets of Rage" as a prototypical personality in a company.  I know several PoR from both Turner and AOL.  Given my time as a sound engineer with Public Enemy, this piece resonated with me in both name and content.  

As an aside, I saw an Amazon reviewer ding the book on use of the female pronoun.  I did the same thing for my dissertation.  One comment: Be the change you want to see.

Starting a company is like making sourdough. Start with culture.

I know it is a bad title.  I thought it was funny.

As a former academic-wannabe, I like to research things before doing them.  I am wired to process information.  So when Joe and I started to talk about the company, I read books and websites on entrepreneurship and founding a company.  There is a lot out there.  Over the next couple of months, I'll post resources that I think are worthwhile.  To start:

Getting the company culture right (or at least not wrong) in the early days is critical.  Once the culture gets ingrained, it is very resistant to change.  Like impossible.  Just so we are on the same page, I think of culture as the beliefs that drive behaviors in the organization.  So the critical thing piece when trying to influence your company's culture is your first set of hires.  They bring their beliefs with them and those beliefs drive behaviors.  Of course, you have to know what beliefs you want to embed in the company.  Then hire, in part, for those beliefs.  And if you find that you made a wrong decision on one of your new colleagues, well, as the CEO, need to make it right.  

If you are starting a company, you should take a look at the Netflix culture deck.  It provides a great food for thought when thinking about what your own company's culture should aspire to be.  There are some things I really like, but at its core, it is an exhortation to hire "stunning" colleagues.  Having great people around you solves a lot of problems.  Check out the discussion of what happens when your company gets large and specialized (around page 45).  I have observed this very phenomena and made the same observation.  But more importantly, they way they avoid the problem is to just hire great people.  And career development?  No formal program.  They provide great colleagues.  You are expected to learn from them.  And how do they find these unicorns.  They pay top of the market.

I don't like that there are nine values.  Seems a bit heavy.  I'll share my thinking in a later post.

How do you finance a Friends and Family round

I am looking at various resources for startups.  Our product will be consumer facing and we'll need to raise money at various stages.  Currently, we are putting together our Friends and Family round.  Typically, this round uses a convertible note where the investors lend you the money to start the business and then that loan gets converted to stock at the Series A valuation.  We are using a similar instrument called a "SAFE" created by Y Combinator.  Same notion, but it is not a loan.  There are some important terms in the SAFE; the premium and the cap.  Both are optional, but seem to be common.  At least in my conversations.

First, you may specify a premium that the investors gets, over and above their investment.  So, if an investor gives you $100k and the premium is 20%, when the shares get issued, they get $120k.  In effect, the risk premium for the investor is 20%, plus they get the upside of any future valuation.

Second, you can set a "Cap."  The cap acts as a maximum valuation for the investors.  Say the cap is $5MM and the investor puts in $100k.  If the valuation at the Series A round is $2.5MM, the cap does not apply.  Note that I did not put a premium on the investment.  Hold that thought.  Now, if the Series A round had a $10MM valuation, the cap applies.  Without a cap, the investor would get 1% of the stock (100k/10MM=.01).With a cap, the maximum the denominator can be is $5MM.  So, in the example, the investor would get 2% of the stock (100k/5MM=.02) regardless of the valuation.

Typically, the SAFE has both a premium and a cap, but the investor gets one of the other.  If the series A valuation hits the cap, then the investor does not get the premium.  Of course, if the cap is not reached, then the premium applies and the cap is not used.

Some investors don't like the SAFE; they have no claims on the assets of the company if management needs to close the company down.  A convertible note has a little more protection.  But in the early rounds, the investors I have spoken with are not worried about a wind down.  They are making a bet and assume that if we need to liquidate, we will do right by them.  And they are right.