allensblog

Allensblog Migrating to Medium.com

This blog has been moved to Medium.com with new and improved features. You may find the new blog here.

Why Do We Give Speeches?

Now that we're neck-deep in the US Presidential campaign, one can't help see the two nominees giving political speeches every time one glances at a TV -- at home, walking through an airport, in a restaurant or bar, etc.  The other day, it struck me for some reason how strange it is that, here in the 21st Century, the speech has survived as such an important form of communication.

The general idea of a speech-as-the-reading-of-a-text has always been odd, but it's especially odd in today's world of Teleprompters. Why would one read a prepared text out loud to an audience, instead of simply distributing the text, itself?  

On all dimensions of formal information theory, giving a speech is sub-optimal.  Slower data transfer rates. Lossy data transmission. No random access. No archival attributes or functions (so review is difficult, unless reversion to the text is available). And, unless the text, itself, is made available, all non-electronic recordings of the speech (e.g., written notes) will be highly lossy. And, finally, if you are going to record it for later review, why not just distribute the text in the first place (actually, in the political context, the text often is distributed prior to the speech, further mooting -- from an information theory perspective -- any benefit of reading the text off the TelePrompTer).

This was all true back when speeches were given from notes, and certainly true if the speaker simply read the prepared text of a speech. It's even stranger, and in some weird way, more fraudulent, when the speech is read from a TelePrompTer. Such a speech suffers from all the aforementioned defects of a speech that is read, word-for-word, from a text, but attempts to hide that fact (in plain sight) and, instead, give the illusion that the speech is extemporaneous. 

Of course, speeches have functions other than transmitting information. Indeed, transmitting information, at least truthfully or impartially, may intentionally not be any part of the purpose of a speech. Speeches, for better and worse, are often used as "motivational" tools, and, in those cases, the information-transmission defects of a speech are not as salient. Indeed, in such cases, they may not be defects at all. 

Except for the use of Teleprompters, all of this is also true for lectures (especially in academic settings). Perhaps even worse, since, unlike a political speech, the main function of a lecture (certainly an academic lecture) really is the transmission of information. 

Even from an information theory perspective, speeches probably did make sense hundreds of years ago, when writing and printing were expensive.  Back then, giving a speech probably was the way to most broadly and cost-effectively transmit information.  By conveying information, even poorly, in a one-to-many format, a speech was still more efficient than the only alternative of talking sequentially to one person at a time. 

Today, of course, not so much.

So why do we persist in giving lectures and speeches?

Politics, Language and Collectives

As many are, I'm reflecting on the recent political conventions.  Probably because each of the main parties is so divided (compared to broad historical norms -- with exceptions), it has highlighted for me the dangers of speaking about collectives (e.g., "Americans", "Democrats", "Republicans", "sports fans", "men", "women", etc.) using terms that are applicable most accurately to individuals.

For example, on almost any issue, it's almost certainly wildly inaccurate to say that "Americans" feel X, think X, are X, etc.  As a proxy for this, consider that most U.S. Presidential elections are decided by less than 3% - 4% of the vote.  In fact, 12 Presidential elections have been decided by voting margins of less than 1%.  So, it's probably safe to say that, on many, if not most, issues, "Americans" or "the People" don't think, feel any one thing, or otherwise have a consensus position.

As with any complicated issue, however, there are nuances.  In certain, narrower circumstances, it's probably not inaccurate to ascribe an attribute to a collective and have it apply to all or most of the members of that collective.  For example, in the fourth quarter of the seventh game of the 2016 NBA Finals, it would have probably been accurate to say that "Cleveland fans were aching for the Cavaliers to win", and have that literally be true of all members of the class of Cavalier fans.

But, once one goes outside that narrow domain, things break down.  For example, if one assumes that Cleveland Cavalier fans are similar to Ohio voters in general, Cav's fans are divided pretty evenly on most other issues.  Using the presidential vote in Ohio as a proxy, the margin of victory in the Ohio Presidential vote since 1996 has varied between 2% -  5%.  That's a pretty even split.

After thinking about it, there seem to me to be three main dimensions along which one should analyze this:

1. Nature and Strength of the Group's Affinity Bond
2. Breadth of Issues
3. Context

Using this analytical framework on the above example, it's probably accurate to talk about (1) Cav's fans (nature of the affinity bond) as a monolith when it comes to issues of (2)  Cav's vs. Warriors (breadth of issues) and it's (3) the fourth quarter of the final game of the NBA Championships (context).  As those constraints are relaxed, however, it becomes less accurate to ascribe any attribute to Cav's fans (or any other collective) as if they were monoliths.  If they're like other Ohioans, Cav's fans are pretty evenly split on most political issues, so statements like "Cav's fans are X", "feel X", or "think X" should be used very sparingly.

This, obviously, is more starkly true the larger and more varied the collective is to which one is ascribing an attribute, such as "Americans" or "the People".  No surprise, this has long been understood by politicians of all stripes, and widely misused in furtherance of getting elected.  Disturbingly, because it plays into the atavistic, "tribal" aspects of human nature, it forms the core of "identity" politics right across the entire political spectrum.

The lesson, I suppose, is to be on your guard whenever you hear someone ascribe an "individual" or categorical attribute to a collective.  Use the three above-referenced dimensions to analyze the accuracy of the claim.  Usually, it'll be wildly inaccurate.

The "Vig" Working Its Way into VC Financings

This post in Techcrunch raises interesting issues around what seems to be a trend in VC financings for "lead" investors to get a better deal than "follower" investors in the same round.  The article asserts that this is typically effected by issuing the "lead" investor shares from the equity incentive pool (called the "ESOP" in the article).

When I started working on VC financings as a lawyer in the (very) early 80's, one of the first things I noticed was that "lead" investors, who did all, or certainly most, of the work on VC financings (e.g., the due diligence, negotiating the term sheet, determining the appropriate valuation, assigning a partner to sit on the board, etc.) didn't get anything extra for it.  They got exactly the same deal as the passive "follower" investors, who did none (or a lot less) of the work. 

This struck me as odd, but, when I asked more senior people why the practice existed, I was told either (1) "hmmm...I never thought about it..."; or (2) the "...VC community is small, and most VCs know that, next time, they're likely to be the "lead" and have to do all the work, without getting anything else for it...".  That is, the principle of reciprocity drove the practice.

Nowadays, the VC community is so much larger, it's not uncommon for a VC to have a long career and never c0-invest more than once with any particular other VC firm -- so, one would think that the principle of reciprocity can't continue to be the driving force (if it ever was).

This "nothing-extra-for-the-lead-investor" practice in the VC world has always contrasted starkly with the common practice in the world of later-stage, bigger-deal private equity/buy-outs, where "lead" investors get significantly better terms, sometimes to the point of outrageous excess (IMHO), than the passive investors who just put money in.  The additional compensation is justified by claims of the additional time, energy, work and attention that the lead investor focuses on the deal --i.e. the same things that "lead" VCs do in early-stage financings.

So, if the Techcrunch article is accurate, and the practice of "value added" (lead) investors asking for terms better than those offered to the follower investors is growing,  I think it's interesting to ask the question, especially in today's much larger VC world (large, and diverse, enough that it's hard to call it a "community"):  if the "lead" VC investor is to get a better deal than the passive, follower investors, who should pay for it?

There are only three possibilities.  The "extra" dilution attributable to the "lead" investor can be borne by (1) the existing shareholders, (2) the new investors or (3) shared in some way by the existing shareholders and new investors.

So, it matters to the existing shareholders of a company where any additional shares issued to the "lead" (or, in the Techcrunch article "value added") investor come from.  If they come out of the ESOP, then, in the ordinary course, the dilution is suffered by the existing shareholders, not the new investors (whether "lead" or "follower").  One wonders whether that's the fairest outcome?  Then, again, when it's a negotiation among a willing buyer (the VC) and a willing seller (the Company), what role does (abstract) "fairness" play?

Entrepreneurs, Don't Forget the Deep, Hidden Competition

In a separate post here,  I wrote about an overall framework that entrepreneurs could use to think about competition -- and how to handle the issue in your VC pitch.

I think the framework is still good for the intended purpose, and I continue to dispense this advice to my "Sherpa" companies today.

There is, however, an additional set of competitors that I didn't mention, which is also very important -- although entrepreneurs will never mention them in pitch decks.   For any particular VC whom an entrepreneur is soliciting, this set of competitors is all the other startups seeking funding  from that VC.

Due to this, VCs with good deal flow (i.e., the one's you want to pitch) have overloaded attention spans.  As a VC, it's easy to feel overwhelmed with the number of "interesting" pitches on one's desk.  Triage on early-stage companies is hard to do, and FOMO is alive and well.  Accordingly, the takeaway for entrepreneurs is that, to get funded, the first thing they must do is get the VC to even pay attention to their pitch materials.

So, make sure your prepare your pitch materials with this in mind: your reader is getting barraged with pitches from other startups.  You need to find a way to stand out from the crowd.  Don't bury the lede.

The Gig Economy

I love the Economist.  But, this article, given my everyday experience, doesn’t feel right – kinda like Robert Solow’s quote back in the ‘80’s, “You can see the computer age everywhere but in the productivity statistics.” (https://en.wikipedia.org/wiki/Productivity_paradox).

My own view is that IT didn't really add to “white collar” productivity until (1) it became (widely) networked, (2) network connections were always-on and (3) computing/communications devices were always connected to the network. 

Standalone PCs are better than typewriters, adding machines, mimeograph machines, etc., but not exponentially better – (one of my favorite quotes from an author I know illustrates this:  “Giving everyone a word processor will not significantly increase the number of great novels that get written.”).

Not sure what the analog is w/r/t the Gig Economy.

True or not, the good news is that it’s certainly not a widely-held belief in the investor community.

The "Forgotten Founder" -- How to Avoid This & Related Problems

Startup teams form in many different ways. Often, the “core” founder does some homework and recruits the founding team. Sometimes, teams are, more or less, recruited by a VC who has a startup idea but needs entrepreneurs to make it a reality. Most often, however, startup teams are formed by people who either currently work together (at the company they’re planning to leave) or who have worked together in the past. In my experience, this process is usually informal and based at least in part on a (sometimes fuzzy) mixture of friendship and perceived competence. As I’ve written here , here and here, it not infrequently goes wrong because one of the founders doesn’t work out and leaves the company with an equity stake disproportionate to the value he added – to the economic detriment of the remaining founders. 

There’s a flip side to this problem as well. 

I call it the problem of the “forgotten founder,” and here’s how it works. 

As noted above, most often startups are the result of informal “nights and weekends” discussions among friends. Not infrequently, the cast of characters changes over time, with “peripheral” people leaving and joining the core group. Early on, the group rarely has any formal legal structure. That is, the group is not usually formally established as a corporation until the founders “get serious”. Incorporation involves lawyers, and most founders don’t have “that kind of money” – certainly not to spend on lawyers. 

Even after the founding team has coalesced, quit its jobs and decided to “go for it”, a VC financing can take a long time. To entrepreneurs, the VC world moves at a glacial pace, even at its best. During this part of the process, it’s also not unusual for one or more of the founding team to leave. Reasons vary. Quite often, however, the departing team member has a spouse and kids who need to be supported, and their net worth is insufficient to sustain them for long without an income. 

What’s the problem? 

It involves two related legal concepts: (1) what type of legal entity, if any, has been formed during the “nights and weekends” phase and (2) what ownership rights can be claimed by someone who participated in the startup discussion and brainstorming – but who didn’t stay on part of the team. 

Forgotten Founder Situation #1. In the early, informal stages of forming a company, you don’t want to be deemed a “general partnership” – for a bunch of reasons. One important reason is that the rules on (1) whether a general partnership has been formed and (2) who’s a general partner (and therefore possibly entitled to part of the ultimate benefits of a successful venture) are not as clear as the rules involving who’s entitled to a stake in a corporation (or possible other “formal” types of business enterprise you might choose). Believe me, you don’t want someone who participated in some portion of the early brainstorming, but who left and didn’t become part of the continuing team, to later claim that he was a “partner”, helped create your new venture and therefore is entitled to some economic stake in it.

Forgotten Founder Situation #2. The law governing who has rights in different kinds of intellectual property is not always straightforward. Moreover, the law in this area is under development because the facts are usually different in each of the cases that make the law. Who is the “co-inventor” of a patentable idea, or the “author” of a copyrightable work (e.g., software code) is not always intuitive. After several years of blood, sweat and tears to make your startup a success, I guarantee that you will not want to share the fruits of that labor with someone who claims that it was partly their idea, but who didn’t make all the sacrifices you and your co-founders did. 

As a lapsed lawyer, I’m not going to give legal advice – particularly any that can be applied to a particular situation. Indeed, the final bit of advice in this post is to engage a good lawyer early (how to pay for it is also discussed). Entrepreneurs do need to know, however, that sometimes the law can have counter-intuitive results in disputes over who owns what – especially when the “what” is intellectual property. 

Here’s some advice aimed at helping you avoid the “forgotten founder” problem.

First, be careful (not paranoid) about who you include in discussions and/or brainstorming sessions about your new company idea. It’s good to test your idea(s) on constructively critical friends and colleagues, but be careful about having someone whom you don’t intend to have as a co-founder deeply participate in the discussions over an extended period of time. 

Second, keep notes of the discussions, including (in general terms) who said what.

Third, see a lawyer early in the process to make sure the details of your particular situation are kosher and that you’re protected (especially about how to apply my preceding two items of advice to your situation). While lawyers are expensive, most of the good ones will work for promising startups on a deferred or discounted billing arrangement. If the lawyer you’ve been introduced to won’t do this, find another lawyer. The really good ones will. To be clear, even lawyers who focus on startups can’t work forever without getting paid. So prudence and clear communication will also have to be your guides. 

It’s really hard to build a successful startup, even when all the planets align. The startup process throws up plenty of unavoidable problems without any help from you. The problem of the forgotten founder is avoidable. When starting your company, do yourself a favor: avoid it.

More on Tough Questions

In a recent post, I advised entrepreneurs seeking VC funding to think carefully about choosing their co-founders. I claimed this decision is often gotten wrong and that, not infrequently, one or more co-founders leave the company with an amount of founder’s equity disproportionate to their contribution (in the eyes of their co-founders). Finally, I noted that, in this situation, the “remaining” co-founders almost always bear the economic brunt. 

How to avoid this? I wish I had a crisp, clean and clear answer. Like a lot of other important questions in life, however, the answers are messy, ambiguous and highly context-dependent. All of us, VC’s and entrepreneurs alike, wish we could just call up “Central Casting” and order “the perfect startup team”. But, of course, we can’t. That said, there are some useful ways to think about this situation, and, below, I’ve set out some guidelines that a VC will likely use in evaluating this aspect of a startup. I hope these will be helpful to entrepreneurs as they’re building out their co-founding teams.

As I mentioned here, founders don’t always pick their co-founders with a beady, cold-eyed, calculating gaze, and with a tough-minded focus on who can actually make the biggest contribution to the Company over its lifetime. Instead, co-founders are often picked because they are friends, or like-minded, or “great people, the kind you’d pick if you were in a foxhole under fire”. For any entrepreneur contemplating starting a company, there is an interesting and helpful analysis of this “choosing-who-to-work-with” phenomenon in a June 2005 Harvard Business Review article entitled “Competent Jerks, Lovable Fools, and the Formation of Social Networks”. If you don’t have access to a hard copy, you can purchase reprints online at: 

.http://harvardbusinessonline.hbsp.harvard.edu/b02/en/common/item_detail.jhtml?id=R0506E 

Starting a company is an act of courage. It’s also tremendously complicated. Almost always, the elements that are “unique” to a particular startup are as important as the elements that are “common” across the universe of startups. As with any set of simple guidelines, the ones below should be considered with a grain of salt. When applying them to your startup, keep your common sense hat on tight at all times. 

1. Incomplete Team vs. the Wrong Team Member? 

A key question any founder seeking VC financing needs to answer is “How complete does my team have to be?” On the one hand, experienced teams with domain expertise covering the principal startup business functions (e.g., product development) are very attractive to VC’s. On the other hand (as I’ve previously posted), teams with the “wrong” people on board are less attractive. A person can be “wrong” for a startup (in this sense) either because (1) he has insufficient business experience, talent or maturity for dealing with the swirling, chaotic world that surrounds every startup, or (2) he is in charge of a business function that no startup needs (e.g., a CFO). So, how should a founder think about this quandary…….? 

As I’ve previously posted here, picking the right VC firm is critically important for any entrepreneur seeking VC funding. VC firms (as well as the individual partners within them) have investing passions for certain markets, as well as areas of market expertise, that will affect their interest in, and appropriateness for, any particular startup. In a similar way, VC firms (and the individual partners within them) have different levels of comfort in dealing with incomplete startup teams (and very early stage deals). When making your list of VC firms to approach, do whatever it takes to find out whether a particular VC firm has the right appetite for a startup at your stage of development. 

Any firm that is comfortable with early stage startups (many VC firms claim this, but, in so doing, are dissembling) will be comfortable – almost by definition -- with “incomplete” teams.

I’ll end Guideline #1 with the following rule of thumb (NOT a commandment): for a VC firm that is comfortable with early stage startups, an incomplete startup team is preferable to a team with the wrong team members. 

Why?

First, VC’s pride themselves (some are even good at it) on being good at helping their companies recruit. If a startup has an attractive couple of founders and a terrific business idea, a VC can imagine how additional, world-class team members could be recruited to fill out the team (as you might expect, the more incomplete the team is, the more important will be the judgment about how easy recruiting will be). 

Second, as I wrote earlier, it’s always hard to transition the “wrong” co-founder out of the Company – it’s also economically unattractive to the remaining co-founders. 

2. Is My Org Chart "Contorted"? 

We’ve all seen a “standard” organization chart. It has (1) the CEO at the top, (2) Four to eight Vice-presidents below, each in charge of a business function and reporting to the CEO, (3) Directors in the reporting chain below the Vice-presidents, and (4) a variety of folks with different (and non-standard) titles in the reporting chain below the Directors. 

I would claim that this “standard” org chart is actually a good template to follow in organizing a startup through, say, the first 40 people. I’m not sure if the converse is true, but I can say (without having done a rigorous study) that, in my 25 years of working with startups, there is an interestingly strong correlation between (1) startups with org charts that were “contorted” in some way (compared to the “standard” one) and (2) startups that ended up with some kind of founder trouble. Thus, if there are “odd” lines of reporting, or if there are “odd” titles that don’t fit in a standard org chart, it usually raises a red flag. If you’re having trouble fitting one of your co-founders into a standard org chart, you should think about whether he’s the right person (or, at least, in the right role). 

A few examples may make this clearer: 

(1) almost no startup “needs”, and most startups don’t have, a “Chairman”; the office has no real meaning in a setting where most of the board members represent major stockholder interests (including holders of founders’ stock); rarely, it might make sense to give the Chairman title to an outside board member who brings particular prestige and gravitas to the Company, and who is “active” in helping the Company in some way; otherwise, it’s usually window dressing and no startup should have window dressing; so a startup with one founder as the CEO and another as the “Chairman” feels to the VC like window dressing intended to assuage an ego rather than a tough-minded business decision. My advice to founders: avoid extraneous uses of Chairman. 

(2) Almost no early-stage startup seeking VC funding should ever have one founder as the “CEO” and another as “President” or “Chief Operating Officer”. This is almost always a sign of title inflation (usually to assuage someone’s ego). Almost guaranteed, any startup that has both a CEO and a President/COO has the wrong person in one or the other (or both) of those roles. This sort of title inflation and proliferation is almost always – like most other “contortions” of the standard org chart – a red flag to VC’s. Can easily be taken to indicate that some of the co-founders are more worried about titles (and ego’s) than success. 

(3) In case I haven’t beaten the “excessive” Vice-presidents issue to death, here’s a final note: almost no startup seeking VC funding should ever have anyone with the title of “Executive Vice-president” or “Senior Vice-president”. Maybe when your startup has 1,000 employees, but not when it’s just getting off the ground. In my 25 years of experience, both as a lawyer representing startups, as well as a VC investing in them, this particular kind of title inflation has almost always been a bad sign: either that someone (the one with the high falutin’ title) is overly concerned with ego and resume-building instead of rolling up his sleeves and actually working, or that “room” in the org chart is being “cleared out” for someone else, who though not ready, nevertheless demands it. 

Another thing founders often fail to realize: not every member of the founding team has to be a Vice-president (or higher). It’s OK to have “TBD” in a number of the Vice-president “boxes” in the org chart of a startup (and elsewhere). For example, don’t worry if you have a great Director of Engineering but no Vice-president of Engineering in your startup. Any Director worth his salt should be able to manage a startup engineering team through 6-8 people, particularly if the CEO has technical experience. In this situation, the VC’s question will be: will the combination of the CEO, the Director of Engineering and the company idea be attractive to a great Vice-president of Engineering when hiring one becomes appropriate. 

Moreover, some Vice-president boxes in the “standard” startup org chart should be empty. Example: almost never is it appropriate for a startup to have a Vice-president of Finance/CFO. 

We have, VC’s and entrepreneurs together, created a somewhat “macho” culture around the act of starting a company. As part of this, entrepreneurs are expected to have a “can-do” attitude, high levels of self-confidence, etc., etc. While some of this is actually productive and helpful, it can also – like any ideology carried too far – be counter-productive and unhelpful. A small, but important, example of this is the concern entrepreneurs have about ever putting “Interim” before their title on the org chart. It’s easy to see how an entrepreneur could assume that a VC would view this as a lack of self-confidence, or as evidence of some other “un-macho” attributes.  My advice, however, is to not be afraid of putting “Interim” in front of anyone’s title when it’s reasonable to assume that an early task of the startup is to recruit someone else to that role. This is particularly, but not exclusively, true of the CEO role. VC’s love entrepreneurs with the self-confidence and guts to start a company, as well as the wisdom to realize that they’ll need help. 

3. Can All My “Vice-President” Co-founders Recruit World-class Talent? 

In their early days, most technology startups don’t need more than one, maybe two, people in any business function other than Product Development/Engineering. Even in a startup, a principal (not the only) job of a Vice-president is to recruit. So, not infrequently, the only Vice-president a startup will need is a Vice-president of Product Development/Engineering (and, as noted above, not always even that).

If one has other co-founders with the title of “Vice-president”, one should be very comfortable that they will be able, when the time comes, to recruit high-quality talent to work for them. In this regard, there are two old, hackneyed maxims that founders should nevertheless repeat to themselves when considering their co-founding team: (1) “A” quality people only want to work for other “A” quality people, and (2) while “A” quality people hire other “A” quality people, “B” quality people hire “C” quality people. Given the difficulty (and economic consequences of) “transitioning” a co-founder out of the Company, make sure any co-founder you make a Vice-president is an “A” quality person. Otherwise, you could have a problem.

 

Some Tough Questions Entrepreneurs Should Ask Themselves

If you want to raise money from VC’s, here’s a really tough, really important question you ought to ask yourself very early in the process: “How many co-founders should I have?” Having the wrong “answer” to this question can make your life difficult in some subtle (and odd) ways. Plus, unlike some miscalculations, here the wrong answer hurts only the founders, not the VC or later employees. Here’s how to look for the right answer.

Although entrepreneurs are motivated by things in addition to money, money’s important to everyone I’ve ever met trying to start a company. Monetary rewards in a startup, as everyone knows, ultimately derive from ownership of stock (not salaries or bonuses). Since there can never be more than 100% of the founders’ stock available for allocation, every co-founder should focus on ensuring that the allocation best matches the realistic, expected contributions of each founder to the success of the Company. 

In Silicon Valley (assume it’s the same in other startup regions), “founders” have a bunch of iconic attributes, some good, some bad.

Although we don’t, we should have a statue dedicated to “The Startup Founder” prominently displayed somewhere in Silicon Valley. Founders are passionate about their businesses, and will run through brick walls to make them succeed. In large part, Silicon Valley’s success is attributable to this passion and “never-say-die” attitude.

That’s the good part. 

Founders are also “expensive” in terms of equity (usually, and sometimes even rightfully, to reward them for taking the risk in joining a startup). Founders are harder than normal employees to transition out of the Company (not legally, just emotionally: “How can we fire Fred? He’s a founder.) Just like most people (including VC’s), founders usually have skills and experiences that are narrower than they, themselves, believe (even sincerely). And finally, founders don’t always pick their co-founders with a beady, cold-eyed, highly calculating gaze with a tough-minded focus on who can actually make the biggest contribution to the Company. Often, co-founders are picked because they are friends, or like-minded, or “great people, the kind you’d pick if you were in a foxhole under fire”. 

That’s the bad part. 

Let me illustrate the problem with a hypothetical (though not uncommon) four-person startup. 

Four friends decide to start a new company. After some jockeying (since they’re “peers” at their current company), they finally settle on the following titles, roles and percentages of the equity: (1) President and CEO (35%), (2) VP Marketing (25%), (3) VP Engineering (25%) and (4) VP Finance/CFO (15%).

To them, it seems logical to have these four (eventually) important business functions covered by the founding team. Moreover, these responsibilities roughly match their (perceived) skills and experiences, although none of them has ever had a title higher than Director, and none has ever had general management experience (i.e., responsibility for a complete P&L). 

They work hard on their business plan and actually come up with a very interesting idea. 

Because the idea’s interesting, they quickly arrange several first meetings at top-tier VC firms, but receive no call-backs. They know that the odds of getting VC financing are low, but can’t figure out why they are having no success at all. Without exception, their first meetings have been energetic and enthusiastic – and no one has pointed out any blind spots in their planning or preparation. 

As it turns out, the VC’s actually liked their idea a lot. The VC’s also actually liked two of the four founders (marketing and engineering) a lot, although no VC they met believed that either of them was ready for a “real” VP role. Unfortunately, when asked, the marketing founder and the engineering founder were defensive about deserving “their chance to step up to the VP level”. That paled, however, in comparison to the defensiveness of the CEO when questioned about his future role in the Company. Finally, the CFO couldn’t really describe what kinds of CFO-like duties he would perform for the first two years. Every duty he did describe could be done by a competent, high-level office manager. 

Spotted the problem….? 

Actually, there are several: (1) the CEO and CFO, who owned 50% of the founders’ stock, were not appropriate for their roles, (2) neither of the “continuing” founders was really ready for a VP role (and was defensive about the issue) and, though less importantly, (3) no startup needs a VP Finance/CFO. 

From the VC’s perspective, this is a deeply “broken” situation, despite the interesting business idea. And since the “broken-ness” involves founders (with all the iconic complexity that entails), “fixing” the situation involves some really hard work and tough decisions. Given the tensions (and lurid myths) that surround VC’s replacing founders, any VC with decent deal flow will simply move on to some other interesting startup that doesn’t have these problems. 

What’s the big deal? 

First, it is extremely difficult to transition a founder out of “their” company. Moreover, as hard as it is for the Board of Directors to make such a transition, it’s virtually impossible for the other, continuing co-founders to do it. After all, they were friends and “peers” who took a huge risk together, as well as a blood oath: “All for One and One for All!”. 

Second, even if it can be done, it’s usually “expensive” in terms of founders’ equity. Frequently, all founders have some form of accelerated vesting (or full vesting) of their founder’s stock if they leave the Company otherwise than by voluntary resignation. In our example, if some VC had loved the business idea enough to undertake the tough job of reorganizing the founding team, the departing founders would have taken as much as 50% of the founders’ stock with them. 

It’s important to note that it is NOT the VC or angel investor who gets screwed here – it IS the continuing co-founders. How so? Think about it for a second… 

When considering an investment, any investor, whether VC, angel or otherwise, will place a pre-money valuation on the Company when they offer to invest. That’s what they think the Company’s worth, regardless of who owns the founders’ stock (a slight oversimplification). If a good chunk of the founders’ equity is in the hands of co-founders no longer with the Company (and therefore who won’t contribute to its success), it doesn’t alter the investors valuation calculation. So, the continuing founders will end up with substantially less equity than they “deserve” – but not because the VC’s were unfair. 

In fact, it can actually be worse than this for the continuing founders. If enough stock has left the Company in the hands of the departed co-founders (in our hypothetical, up to 50%), an investor may simply decide that there isn’t enough equity left to properly motivate the continuing founders (calculating what additional stock must be reserved for future hires). In this case, the top-tier VC simply moves on to an equally interesting, but less troublesome, situation. 

What would have been a better strategy for this startup? Like everything else important in life, it depends…… 

In my next post, I’m going to suggest some things for entrepreneurs to consider as they put their founding teams together. 

Hopefully, they'll help.

In the meantime, however, before you prick your fingers and take the startup company blood oath, do the tough part and carefully evaluate who is on the founding team – you owe it to each other.

Success = Co-founder vs. Failure = "Early Employee"

Have you ever noticed, that, after the fact, successful companies have many "co-founders", while failed startups have only "early employees".

I first noticed this phenomenon when I was a VC, back in the early/mid-2000's.   PayPal had just completed the first "mega" acquisition of the post-dot.com-nuclear winter (the price was ~$1.5 Billion -- pocket change, it seems, in today's frothy M&A environment). 

As typically happens after acquisitions like this, the PayPal employees began to trickle out of eBay over the next year or so.  This occurred for all of the usual reasons that plague post-acquisition integration:  financial reasons (becoming fully vested, etc.), as well as a mismatch between the cultures of the two companies that began to wear on both sides.

In this diaspora, some went into venture capital, some "retired" and, among a number of other pursuits, some went on to start new companies.

As these startups began to pitch the VC community, a number of them came through my firm.  I began to notice that anyone who had worked at PayPal in the first year of its existence identified themselves as a "Co-founder".  Through coincidence, I happen to know a lot about the actual facts of the founding of PayPal (actually, two separate companies that, after a year or so, merged to become the "PayPal" that we all remember today). 

So, I knew that most of the claimants were, in the charitable cases, puffing, and, in some cases, simply misrepresenting the facts.  The human desire to bask in reflected glory is deep and longstanding, but it always lowered my estimation of the person who falsely made the claim.  Normally, it was enough of a reason for me to pass, and move on to the next company.

Surprisingly to many people, and unlike seemingly similar terms, such as "Chairman", "CEO", "Board Member", "VP Marketing", the term "Founder" has no legal significance.  It's not mentioned in any corporation law or regulation, and no legal penalty attaches to its mis-use.  No legal obligations flow from calling oneself a founder (unlike the legal job categories listed above).  So, naturally, one would expect "title-inflation" to occur here -- and it does.

The history of Facebook is a more recent object lesson in this phenomenon.

The caution offered here is that Silicon Valley, for better or worse, is a small town, and the early histories of many companies, especially the successful ones, are well-known.  It doesn't help, and can harm, your chances of getting financed by falsely claiming co-founder status.

Managing Your Board of Directors -- Great Advice, From Someone Who's Good at It

Here is some advice for CEO's from a good friend of mine, John Kernan.  John has been a successful serial entrepreneur for 40 or more years.  John has, over the years, run companies that have been wildly successful, as well as a couple that have failed.  Over this long career, John developed a set of "rules" that help a CEO keep his (or her) board focused on helping move the Company forward.

I've worked with CEO's for more than 35 years, as a lawyer, as a VC and, nowadays, as a "Sherpa", and John is the best CEO I've ever met at "managing" his board of directors.  In today's world, the term "managing", when used  in connection with an information-intensive process (like CEO/Board relations), frequently takes on a negative connotation.  I mean something different and positive.

What the 10 rules listed below are aimed at doing is helping the CEO use the Board of Directors in a way that best helps the Company make progress -- not by hiding information (you'll see below John's advice on dealing with bad news), but by being aware that one's board of directors, like any group of human beings, can be organized in a way that is constructive -- or not.  Successful CEO's realize this and proactively try to get their boards to operate in a way that best helps the Company -- it will not come as a surprise to anyone that Boards don't necessarily self-organize into highly efficient, constructive, high-powered and helpful groups of advisers.

Here's his take on how to do this.

1. NEVER have the board meeting "at" the board meeting.  ALWAYS call every director a few days before the meeting and run every important issue by them to get their input, Also update them on company performance, especially the bad news, and let them "beat you up" privately. That way, the meeting can focus in a constructive fashion on problem-solving and building the Company for the future. 

2. Maximum PowerPoint show is four slides from any presenter, especially yourself. This should be the limit of director interest in detail. 

3. Provide complete access for the board to everyone and everything in the Company. They will rarely use it, but it's a great comfort to them to know you are not trying to hide anything. 

4. Have your key team members do almost all the presentations. It gives them exposure and allows you to make sage comments along with the rest of the board. A perfect board meeting is when 10% of the talking is done by the CEO, 60% by the team, and 30% by the directors. 

5. Carefully consider every director's input and take good notes at the meeting. These people have lots of experience and many great contacts. But you make the final decisions (and if you don't, they will start to look for someone who will). 

6. Give the Directors projects in their areas of expertise. It's free consulting and they usually do a good job. 

7. Get in front of the board on tough decisions like top management changes, including changes to your own role. If it's going to happen, make it your idea. 

8. For VC directors, try to picture how they are describing your Company to their partners, and what questions their partners are asking. Your job is to make each director a hero to their partners (or corporate boss). 

9. Remember it's Company first, team second, you last. You win when everybody wins, not when just you win. 

10. Make a friend of every board member. Send them interesting deal ideas you turn up, learn about their interests, make the board a "look forward to" experience for everyone. 

If you work hard, always act in good faith and in the best interest of the Company -- and if you follow these 10 rules -- most VC's will still be interested in financing your next deal, even if the Company tanks.

And if the Company is a success, they will be throwing money at you!