Skip to main content

Posts

Showing posts from February, 2010

Deal Terms: Liquidation Preferences, Founder Options

Liquidation preferences have always seemed to be a case of having your cake and eating it too for investors. I'm guessing the original intent was strictly for downside protection. But it's become a way for investors to guarantee a certain upside--risk mitigation at the expense of common.

Put another way, it's terms like these that value capital over people. A common example I give when explaining it to incredulous entrepreneurs is this (let me know if I have it right): say you raise $1 million at a $4 million pre, giving a total of $5 million., so 20% to the VC.

Then you exit for $10 million--double, right? So what's the VC take?

28%.

First million out the door, leaving $9 million, then pro-rata distribution, so 20% of $9 million = $1.8 million, so $2.8 million total, or 28% of the exit. Return of capital is important--I think as an entrepreneur I am obligated to return capital, so I don't mind the downside preferences---a 1x cap makes sense to me.

Of course a $20 milli…

The Importance of Call Volume for Execs

First, let me say I always appreciate the courtesy of a phone call, even when it's disappointing news. I think people deserve the call back. When I don't want to buy something from someone who calls repeatedly, I call back or email back to let them know they should move on. Courtesy is easy and always good for business. I don't always get that same courtesy, and I notice. Moving along...

At two of my companies we had sales teams in smile and dial mode. Leads were plentiful from word of mouth, buzz, and partners, so the calls were always to largely qualified leads.

This week (already) I was reminded of how important call volume is for anyone in "sales" mode. Whether you're a startup exec, a salesperson, or advocate, your success isn't going to just show up one day--you have to work for it. That means you have to make a certain number of contacts to get results. Same for fundraising for startups--you only need 1 of the 100 VC you'll talk with to fund you…

100% of Nothing

One of my investors argued with me that I'd end up with 100% of nothing if I passed on a deal. And I know the argument well.
In that case, it was a bad deal, but it was the only deal, and was something we likely should have done. I didn't block it but did ask so many questions they tabled the deal. Bad deals are like that--they don't do the job of convincing everyone it should get done, and then they languish.


With deals, there's negative dilution and positive dilution. Negative dilution is when you give up a percentage of ownership and get nothing (or worse) for it. Positive dilution is when you give up a percentage and get more than what you gave for it. Employee options, new capital, partnerships, new equipment--every investment is about positive or negative dilution.


When something costs you nothing but brings the possibility of revenue, new markets, brand awareness, and opportunities, you're nuts to say no. When it costs you nothing, you say yes. But many, many e…

Beta Update

Sometimes things just aren't going well, yet things are going really well. I haven't worked in over a year, and have been kicking about trying new things out, figuring things out, and finally committing to an idea I've had for a long time.

In between I've consulted to a number of companies--mostly startups. A few actually paid me; the rest I was happy to help for nothing because I was, well, figuring it out. Lacking confidence. Despite all of the experience I've accumulated over the years, confidence in that experience is sometimes weak, sometimes strong. So back to software.

But getting the software out has been tough. Every time I want to refine the software, I have to learn some new programming technique. What seems like a simple fix, ends up taking 5 hours to learn that the syntax is a bit different from earlier syntax.

Every week I've had major breakthroughs and spurts of great progress. But in between there's been a lot of hard work and research that doe…