When you first took that early stage startup job you were likely enticed by startup lottery tickets called ‘stock options’. These options to purchase shares in the company were granted to you at some exercise price and they vested over a number of years. Lets assume its been a couple of years and you’ve decided to leave to start your own company. Did you realize that in most cases you need to exercise those options within 90 days of the termination of your employment? If you don’t exercise those options you’ll lose them. Ouch!
Here’s how it works. Lets say you were granted 30,000 options at a dollar a share that vested over three years. You’ve been at the company for two years and you’re ready to leave. Within 90 days you need to write a check to the company for $20,000 to exercise your option to buy 20,000 shares (the amount that has vested). Again, ouch! You’re leaving the company and the absolute last thing you want to do is write them a check EVEN if you think the shares will be worth far more in the future.
So what do you do? My advice to employees taking early stage jobs at startups is to negotiate their employment contracts better. The easiest language to add to your agreement is a simple provision that requires the company to ‘loan’ you the money to exercise your vested options upon termination of your employment. In the case of this loan no money would change hands AND you only pay when you can sell your shares (the shares are the only collateral for the loan). Remember, your holding period does NOT begin in this case from an income tax perspective. If you want to begin your holding period upon exercise you need to ensure that the loan is full-recourse (i.e. you own the money even if the shares turn out to be worthless). My advice? Make sure the loan is non-recourse AND don’t worry about paying the higher tax rate. Good luck and keep exercising.
The Texas startup world is abuzz with the news that Austin Ventures has FINALLY died. Dan Primack in penning his Fortune article titled, “The death of Austin Ventures” has decided it is time for the eulogy. Of course most of us have known Austin Ventures has been dead for years – just ask Joshua Baer.
When I was an inexperienced 20-something entrepreneur I received my first termsheet from Austin Ventures – 5X participating preferred AND a signature line with the title “interim CEO”. I ended up raising more than $20M from investors in Silicon Valley and New York at 1X and as CEO – we returned 600X to our investors in the end. I’ve always had a chip on my shoulders when it came to AV and I’m not alone.
The Austin funding scene has been gutted over the past several years. Today there are only a few small funds left to fill the void left by AV including:
This void is being filled by Houston and Dallas funds like Mercury and accelerators like Tech Wildcatters and TechStars, but it is indisputable that startup gravity in Texas is moving toward Dallas and Houston – Austin is getting left behind like Rick Perry and his Presidential campaign.
If you have any doubt check out Dallas’ Startup Week • March 2-6th.
If you don’t know about Dallas Startup Week you’re either a hermit or an entrepreneur busy building her startup (I’ll assume the latter). If you’re interested in the startup community you NEED to make an effort to show up. Get your all access pass HERE for free. Then visit sched.org to build your schedule for the week. Some of the more interesting presentations/events include:
Monday, March 2:
9AM • A VC, an Angel and an Entrepreneur Walk into a Bar.
10AM • Intro to mockups and wireframing.
11AM • How to survive being sued by a billionaire.
6:45 • Phil Romano on launching a startup.
Tuesday, March 3:
2PM • Startup marketing.
6:45PM • Baxter Box Spotlight
Wednesday, March 4:
12:24PM • Creative Space bus tour.
3PM • Brewery Startup Story.
6PM • Startup sticker party.
7PM • Product Hunt Dallas HH
Thursday, March 5:
10AM • How failure fueled my startup success.
6:45PM • Brad Hunstable Spotlight
Friday, March 6:
1PM • Technology in Fashion.
3:30PM • Crowdfunding and SharkTank
5PM • Wine Tasting.
7PM • Wrap Party.
Some of you have noticed I’ve been more and more involved with the folks at CultureMap. There isn’t anything to announce on that front just yet, but I did want to make sure you checked out the amazing event Jessica Baldwin and the rest of her team at CultureMap have put together – CultureMap Social: The Arts Edition.
Held at the Fashion Industry Gallery, the event brings together Dallas’ most eligible entrepreneurs and hottest fashionists for an amazing evening of arts, alcohol and fun. Here are some of the details:
- Get creative in Cadillac’s Air Graffiti photo booth
- Browse gorgeous goods at a pop up from one of the city’s best kept shopping secrets: the Crow Collection’s Lotus Shop
- Enjoy a beverage in the Post Properties Lounge
- Create your own masterpiece in the Pinot’s Palette Paint Studio
- Give your nails an edgy update, courtesy of MiniLuxe
- Take home Must Have Swag from Read Between the Lines and Foot Cardigan
- Get smart about art courtesy of Dallas Art Fair and experience a super cool video installation from Zhulong Gallery
- Plus, bites by Savor (stay tuned for info on the after party) and tunes by DJ Blake Ward
So if you’re interested in plugging into the startup community in Dallas, but would like to find your Muse come on out on March 11th 6-8PM. The tickets are $20 and include beer, wine, bites and valet. This event will sell out.
This morning I was reading about Brad Feld’s first board meeting where he asks the reader if they remember their first board meeting. I remember mine vividly.
It was in the late nineties, I was in my late twenties and I had just raised $11M for my first venture backed startup, LayerOne. The venture capital firm had two seats and I controlled three. They were located in New York so we held the meeting on the phone. The first topic of discussion were option grants we needed to make to a few advisers who had helped me along the way. I had promised the options and they were terribly material; however, the two VC board members objected STRONGLY to the grant.
Remember, this was my FIRST board meeting and I was an arrogant twenty-something who raised $11M for an idea and a prayer. The younger of the two VC board members attempted to coach me on the board call explaining that all of our votes should be unanimous and that we shouldn’t have contention – especially this early in our new relationship. I explained that I had ‘PROMISED’ the grants and that I couldn’t imagine not honoring my commitment. Ultimately we granted the options.
This was one of many mistakes I made as a first time CEO. In retrospect I should have tabled the matter and talked to each director privately, explaining the situation and asking for their support. I just assumed since I had three votes on the board I could do whatever I wanted – I was dead wrong. You need the support of your board and getting them comfortable is vital to the success of your company.
This morning during my office hours at Cafe Express I had the opportunity to meet with an entrepreneur who is just beginning the process of looking for seed/angel capital for his startup. He had a deck, an idea, a team and was hoping to get some help finding potential investors. I could have made a few referrals, but figured it would MORE helpful to share my own personal experiences raising seed and/or angel capital.
Thesis One: Money Ain’t Equal
When we began looking for seed investors for ViewMarket (an ecommerce marketplace for video content creators) we intentionally sought out investors who’ve had success in the space. For example, we thought Dave McClure would understand the ecommerce aspect of the business from his early experience at PayPal. Next we thought Christine Tsai would would understand the video part of the business from her early experience at YouTube. Finally, we thought Will Bunker would understand the analytics side of the business from his experience as one of the Match.com founders. Once we secured funding from these three we knew we were onto something – they helped us validate our own thinking. Had we raised money from local real estate or oil and gas investors we we’d still be wondering if we were on the right track. Smart money CAN be very smart.
Thesis Two: Smart Money Begets Smart Money
Eventually, if you have any level of success, you’re going to raise a Series A investment from institutional investors (VCs). The fact that you’re earliest investors are familiar with the space and had their own successes will give you a big leg up. First, it is very likely that these engaged angels will help introduce you to the same investors who funded their prior companies (presumably the VC made a lot of money on this deal so they’ll take the meeting). Second, other investors, when they learn that seasoned/successful/known entrepreneurs have risked their own money to help you launch they’ll be curious and want to meet.
Given these two thoughts I recommended that the entrepreneur do the following:
- create a list of all former/current startup competitors.
- create a list of all startups that have ‘pain’ that his product solves.
- create a list of the investors in the above companies.
- create a list of the founders of the above companies.
- reach out to the investors to ask advice about his product and ask for referrals to potential seed investors.
- reach out to the founders to ask advice about his product and ultimately ask for investments.
Only AFTER the entrepreneur had secured an investment from two of these angels should he move forward with a broader conversation with more financial investors. This process will save you a LOT of time. If you can’t convince someone who’s had experience and success in your space to invest – you might want to keep working on your idea before raising money. Remember, most startups fail. If you can find a few entrepreneurs who’ve been there and done it in your space you’re much more likely to find success – leverage their experience. Good luck!
I was reading Kyle’s Wong post on LinkedIn titled, “Making An Impact At An Early-Stage Startup If You’re Inexperienced And Don’t Code“. His points are good, but I think he is missing the real point. If you want to join a startup these days you need to do one of two things:
- learn how to code
- learn how to sell
I’ll tell you my first secret, learning how to sell is MUCH harder than learning how to code. Many developers will likely argue with me, but I can let you in on my second little secret – my 13 year old learned how to code in two languages by the time he was 10. Coding isn’t rocket science – it is something you can learn over the summer. There are scores of online learning resources and with new languages like Apple’s Swift there are more and more opportunities to become an expert within months. My advice? Learn how to code iPhone apps using Swift and start your own company or join a startup. It will be a lot easier than starting a company as a non-technical founder or joining a startup as – well whatever inexperienced non-coders call themselves.
My third little secret is that people who know how to sell make a LOT more money than people who only code. The people who had sales skills at each of the startups I founded got paid more than me – a lot more than me. Selling is a LOT of work, but its a lot of fun. And you CAN learn how to sell. Selling skills translate throughout a startup. For example, when you are recruiting new employees or raising money from investors you’re really just selling them on the vision of the company.
The best place to learn how to sell? The BIGGEST company you can find. They will invest tens of thousands of dollars in you in an attempt to teach you how to sell. Some of the biggest telecom and internet companies in the world spent hundreds of thousands of dollars teaching me to sell. They made HUGE investments in me and I sold millions of dollars of stuff before I left to start my own companies. Take three years and REALLY learn how to sell. It is a BIG investment of your time, but along the way you’ll make a lot of money AND obtain a skill that is very hard to learn.
Most VCs look to hire a CEO who can sell when looking for your replacement. Be that guy/girl from the start. Selling makes everything else possible. Good luck!
Wait a second… Only two? Help me complete this list!
Once a startup founder has raised outside capital, regardless of stage or amount, it is time to think about building a lasting relationship with his investors. Here are my top four tips:
- COMMUNICATE regularly with each investor/director by sending a monthly progress/update email. Spend 30 minutes detailing all your accomplishments, challenges and go-forward plans. You don’t want to wait until your next board meeting or until they email you asking what the hell is going on.
- ASK each investor/director for help each month. Think about how each investor/director can help you – perhaps with a product launch, a candidate for employment or a business development deal. If you keep them busy they will be a LOT less likely to get in your ‘business’. One of two things will happen – you will get much needed help or he will hide from you.
- MEET (in person or via phone) with each director PRIOR to each board meeting. Show him your agenda and ask him if there is anything he’d like discussed at the meeting. If there are controversial issues to be discussed determine where he stands. If he’s on your side enlist him to meet one-on-one with directors who might not be on board yet PRIOR to the board meeting.
- DOCUMENT each interaction with your investor/director. The day after your board meetings email an overview of what happened and what decisions were made to each director. You will approve the minutes at the next board meeting, but you’d be surprised how time can change your perception of history. Do the same thing EVERYTIME you engage with your investor/director – a quick followup email detailing what was accomplished and what everyone has committed to do is VERY important.
Let me know if you have any ideas to improve your investor/director relationships.
If you said, “Investing in bad deals” you would be dead wrong. Mike Arrington asked Sequoia partner Roelof Botha the same question and Botha explained that missing winners was the biggest risk. Botha explained that it is a MUCH bigger problem to miss winners versus investing in too many losers. Botha and his team passed on a number of hits including Twitter, Zynga and even our own ShopSavvy. He explained, “Because of the way the model works, returns are very asymmetric – a failed company will lose 1X, but a home run could get 50X or 100X upside.” As his partner Doug Leone explained, “When in doubt, lean forward.”
When negotiating with a VC remember that #FOMO (fear of missing out) is VERY real and that you can exploit it.