TiEcon has become a huge event for entrepreneurs all over the world. It helps educate the entrepreneurs and connect them to clients, mentors and capital.
They have many good programs for entrepreneurs like Mentor Connect, where people meet potential Mentors who are people with a lot of experience starting companies. They also have a Founder Connect program where people speak of their ideas and look for either founders or capital.
I met people and reporters from Australia, Japan, Nigeria and Brazil, apart from the usual countries. This has become a global event, because TiE serves a big need.
Saying “TiE is for South Asians” (Indians/Pakistanis) is like saying “the US is for Europeans”. The successes TiE and the US have accomplished require being open and inclusive.
Just like the underlying value of the US is the preservation of freedoms, TiE’s value is to nurture entrepreneurs and grow its community.
TiE’s organizers realize the value of being well connected to achieve its goals. They have succeeded in attracting large volumes of the right kind of attention.
At Mentor Connect, I met Seshan Rammohan and Siren Dutia, both veterans of the field. Typically Mentor Connect puts a single mentor with 5 founders looking for advice. Fortunately I got two mentors’ time and minds for the price of one.
The discussion was interesting because we heard about the problems that different founders face. The advice was very useful.
I went to a few talks, but I’ll cover three to keep it short.
One superstar at TiEcon was Steve Blank, who originated the methodology that launched the Lean Startup movement as described in Eric Ries’ “The Lean Startup.” The core message is to start small, get out and talk to your market and build what customers actually need and want.
Startups are not small versions of large companies. They are in search of business models that work. Large business on the other hand execute strategies.
Steve mentioned a book with pictures called “Business Model Generation” for people who want to build a startup. I’m curious.
In a startup you build things that get you the maximum learning. Before you fire execs, it is a good idea to fire the plan and try another.
Startups are under a lot of pressure. They think in terms of their burn rate and their runway.
Startups should ideally plan on discovering a businesses that works. An exit should be the last thing on their mind.
The reasons people acquire a startup are:
- An existing product, e.g., whatsapp
- P&L and good cash flow.
- Technology: Oclulus
- Acquahire — when they want the developers, but for something different.
Startups have a different culture. Assimilation into an existing business can wash out the productivity because the processes in place for execution are different from innovation, i.e., Key Performance Indicators (KPIs)
A panel discussion: How not to mess up the cap table
The cap table is the definition of who owns the company and their rights. It typically defines the stock holders, the debt holders and the liquidation preferences (who gets cash before whom).
A VC mentioned an interesting incident where he killed a company by asking who owned it. The founders got into a fight and decided not to form the company!
It is also a good idea to have a vesting schedule so that one of the founders doesn’t “… go to Brazil with his wife with his share of the company while the others work for their equity.”
20% of allocation of stock is usually based on role of people in past; the rest is about future.
Standard vesting for employees is 4 years.
Investors get preferred stock, because they want to get their money back first. This is changing with Y-Combinator’s SAFE and Founder Institute’s Convertible Equity ideas. Another reason to be careful is that option pricing would be set by investors if they take preferred.
The things to worry about in a funding round are:
Valuation: No one forgets this. Clearly, the higher the better.
Control: Who controls the board seats and voting rights. This is tricky because rights and seniority affect the way people think.
Rights: What special right do investors get, such as a board seat.
Seniority: Who gets their money first.
Founder rights: How can founders be removed from power? Typical statement is a felony., but you could ask for “willful and persistent gross negligence.” It is also important to negotiate severance as a part of this deal.
There is a difference between preferred and non-preferred stock. Preferred allows double dipping. Investors get their money back and then some more of the stock.
Usually investors own 25% after first round.
The difference between negotiation and begging is leverage. Get a few investors to land at the same time and you are in a much better negotiating spot.
An important decision is to file the 83b election within 30 days of getting equity. The founder will be required to pay taxes on the portion of equity that vests if this is not filed. This likely involves a cash flow mismatch because the founder may not have liquid cash when the equity vests.
For more information read Founder’s Workbench 83 (b) Election
Other common mistakes startups make include:
… not having a clear focus.
… compensating people and getting clear ownership of code written for the company.
There are two options: the pain of disappointment or the pain of discipline.
The best time to plan to exit is as early as possible.
Early thought can include, Are there going to be a lot of companies that will be interested. Is it a good IPO idea?
Ashmeet Sidana says there are two exit scenarios.
… Approached for an exit.
… Or things don’t work out.
A banker or a business relationship usually leads to an intro for these.
Lots of teams are typically involved in exits. The deal team will work on the deal. CPAs, lawyers and wealth managers are usually involved.
Then there is the question of what happens to the cash. Typically people use trusts to allow continued investment and avoid a steep tax. This also allows for a tax shelter for money designated for charity.
Exits are most intense periods. Cases where board meetings happen every 3 hours are common.
Think also of what to do next after the vacation at the end of the deal.
Where does the money get wired?
At the time the M&A term sheet is signed the probability of acquisition is 40%.
In contrast the probability of funding is 80% in VC rounds.
Time can kill deals in M&A. However clarity is important as well. A CEO once took time to work out every detail and the final deal was very close to the term sheet.
Ask what is the reason people are acquiring the company? Alignment is important. Avoid conflicts of interest at this critical time. Try to create a separation from noise in the markets.
Founders should negotiate to get some liquidity early to pay for costs.
Image credit: Alpha Sangha