A Friday series exploring Startups and the people who make them go. Read all If the Shoe Fits posts here.

Tuesday I cited a post by Scott Belsky on Medium talking about how employees are often conned (my word) by founders, especially unicorns, when it comes to the wealth that is supposed to flow from their ISO.

As pithy as the post was, some of the comments were even pithier. I especially like this one from  colorfulfool (21st comment)

If profitability were proportional to hypocrisy, there would be no failed startups in the Valley.

Not just true, but succinctly and elegantly stated.

Founders love to talk about the importance of transparency, trust and authenticity.

However, their stock plans and pitfalls thereof exhibit such a high degree of opaqueness and caveat emptor that they kick a hole the size of Texas in the fabric of the founders’ authenticity.

Another prevalent piece of hypocrisy is “change the world.”

Do you really believe that another dating app or being able to evaluate a new restaurant or a better way to buy your groceries will change the world?

While they may impact one’s personal world, they certainly don’t have the impact of something like Mine Kafon.

What is proportional to the Valley’s hypocrisy is its sheer greed.

Actually, when I stop to think about it, the greed probably exceeds even the hypocrisy.

Image credit: HikingArtist

A Friday series exploring Startups and the people who make them go. Read all If the Shoe Fits posts here.

Users, users, we’ve got users.

Hypergrowth has been all the rage for the last few years, but is it enough?

Twitter’s Q1 revenues  were $595 million, but it’s still not profitable. The stock tanked 14% in after hours trading and is about $35 below its 52 week high and $11 below its IPO price.

The company continued to lose money in the first quarter, posting a net loss of $80 million. That’s less than the $162.4 million that it lost in the year-ago period.

Meanwhile, Etsy turned a surprise profit a year after it went public; the stock jumped 12% in after hours trading, but that’s still down nearly 50% from its IPO price.

The crafty online marketplace posted its quarterly earnings on Tuesday, and reported its first quarterly profit since going public in April 2015.

For years, the attitude, fueled by the likes of Paul Graham, has been who needs profit?

Bill Gurley’s recent post was not only a wakeup call, but scared the hell out of a lot of founders who looked to funding, instead of profits, for their valuations.

In Silicon Valley boardrooms, where “growth at all costs” had been the mantra for many years, people began to imagine a world where the cost of capital could rise dramatically, and profits could come back in vogue. Anxiety slowly crept into everyone’s world.

Harry Edwards, an emeritus sociology professor at Cal, recently made a very apropos comment, although he was talking about race and the NFL.

“Progress is one of those issues that’s like profit: It really comes down to who’s keeping the books.”

“They” keep saying that the problems today are different than those that caused the dot com crash. But I think at heart they are very similar.

In both cases the emperor had no clothes.

Granted, for a long time his clothes were described differently than in 2000.

But the in both cases, the clothes were strictly in the mind of the beholder.

Image credit: HikingArtist

Ever wonder what the old proverb, “the proof is in the pudding” means?

No? That’s good, because it has no meaning.

Why? Because the phrasing is incorrect.

The original proverb is: The proof of the pudding is in the eating. And what it meant was that you had to try out food to know whether it was good.

Startups are like that.

Creating them doesn’t prove anything.

Neither does customers trying them out.

Funding rounds proves even less.

Only when the public market or another corporation has the appetite to eat is the value proved.

Or is it?

Living Social and Groupon are proof that those appetites are fickle as a teen.

Square lost nearly half its value in its IPO (priced $6.46 below the last funding round) and now being actively shorted.

The true test is whether the appetite is sustainable.

Sustainable isn’t just a matter of price; share prices will always go up and down — that’s the nature of the beast.

It’s not even about profitable.

Sustainable means a business model that generates enough revenue to function, grow and innovate without requiring new/outside infusions of cash — like Amazon.

Flickr image credit: Ruth Hartnup

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.

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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)

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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.

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EXITS

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

A Friday series exploring Startups and the people who make them go. Read all If the Shoe Fits posts here

Whether you are a startup entrepreneur, work in a startup, invest in startups or just find the whole topic interesting this series is intended to shed some light on the dark mysteries surrounding stock and options and they way they’re handled (or abused).

In general, the way startups choose to give out incentive stock options (ISO) reflects the founders’ attitudes towards fairness and merit; and it sends some signals about whether these values are authentic or just platitudes.

I’m also delighted to introduce Matt Weeks who, in addition to being on the RampUp Solutions board, is President of Actio and deeply involved in the startup world, as well as having held marketing positions in corporate America. Matt will be contributing his knowledge and experience detailing the ins and outs of startup MAP, even though he may not think of it like that.

Here’s a sneak peak of some of the ideas we’ll be discussing.

• Risk mitigation
• Why managers who don’t have a plan are condemned to becoming part of someone else’s—such as the candidate’s
• Good vs. Great
  1. Leading by bullying (lack of transparency and authenticity) can (possibly) make a company “good”
  2. Leading by authenticity can dependably make a company great (because the team is driven by common goals, outlook and honesty)
  3. Why when push comes to shove #1 falls apart (sounds obvious, but there is more subtly here than you might think), while #2 holds together and fights through.

There’s lots more, so plan on joining us every Friday as we explore these and other topics.

One last note. This series offers value even if you have no intention of being and entrepreneur or getting within a hundred feet of a startup. When all is said and done, entrepreneurs are people; people have MAP and the more you learn to recognize MAP characteristics the better off you will be, because MAP drives culture in every organization, large or small.

Option Sanity™ reflects and supports your company’s values and culture

Come visit Option Sanity for an easy-to-understand, simple-to-implement stock process.  It’s so easy a CEO can do it.

Warning.
Do not attempt to use Option Sanity™ without a strong commitment to business planning, financial controls, honesty, ethics, and “doing the right thing.” Use only as directed.
Users of Option Sanity may experience sudden increases in team cohesion and worker satisfaction. In cases where team productivity, retention and company success is greater than typical, expect media interest and invitations as keynote speaker.

Flickr image credit: Kevin Spencer

Yesterday I shared my love of crossing stuff off lists because of the sense of accomplishment it brings, but that kind of stuff is small potatoes; it lifts me up and helps me move forward, but it isn’t a substitute for hitting the goals that move my life.

I just hit the biggest one on my list and want to share it with you.

For the last several years we’ve been working to turn a consulting approach for allocating incentive stock in private companies based on the company’s values and culture into a web-based subscription service (SaaS)—and it’s finally a reality!

Not only that, but because I hate the way traditional Help works, I conceived a brand new, user friendly type of Help that our programmers implemented brilliantly—you’ll love it.

It’s a soft launch, but Option Sanity™ has its second beta client (I’m looking for three more) and is looking good.

But it feels strange; for so long the focus and the goal has been to produce the software and the website. That meant working with the programmers, tons of writing and editing, working with the guy who originated the math and mechanics of Option Sanity™ and who was primary tester and developing my own skills as a user.

Now that it’s done I keep waiting for a massive feeling of accomplishment and although it’s there it’s dwarfed by what needs to be done now—marketing, identifying and closing multiple sales channels, supporting new users, developing a FAQ based on their questions, creating a user community—the list seems endless.

With all that starting me in the face I thought I’d ask for some help.

It would be terrific if you would to www.optionsanity.com, read about the product and click Take the Tour. Unfortunately the tour isn’t done, but on that page you’ll find a link to the full app demo.

Check it out and then leave your comments on the review page. Forward the information to anyone you think would be interested

I know it will take a few minutes, but I would be eternally grateful.

Thanks!

Image credit: RampUp Solutions

I want to share three comments from Jeff Bezos today, because tomorrow’s post is about him.

They all focus on the financial side and point up the great difference between Bezos and many other CEOs when it comes to money and stock.

If Bezos is anything he is pragmatic and real—no BS. And that is just as true when he is talking about entrepreneurial topics as about his business.

The truth in this comment has only increased over the years and will continue into the future. “Good ideas will always get funded, so that’s not going to be a problem. But you will see that it will be harder and harder for bad ideas to get funded.”

“It’s part of the territory with Internet stocks, that kind of volatility. It can be up 30 percent one month, it can be down 30 percent in a month, and a minute spent thinking about the short-term stock price is a minute wasted.” Obviously, Bezos never wasted any minutes on the subject.

If you’ve followed Amazon at all, you know that every time Bezos invested in better technology or added product lines Wall Street predicted its imminent demise. Even today, after a decade of success, the analysts question Amazon’s every move.

Bezos takes it in stride, still focusing on the long term and customer satisfaction, as he has all along.

“No. I’ve taken plenty of criticism, but it’s always been about our stock price and never about our customer experience. After the bubble burst, I would sit down with our harshest critics, and at the end of the meeting they would say, “I’m a huge customer.” You know that when your harshest critics are among your best customers, you can’t be doing that badly.”

Join me tomorrow for a look at Bezos’ approach to nonmarkteing.

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Image credit: etech on flickr

Post from Leadership Turn  Image credit: raajmb  CC license

By Wes Ball, author of The Alpha Factor – a revolutionary new look at what really creates market dominance and self-sustaining success. Read all of Wes’ posts here.

To grow a company and make that growth sustainable, top leadership must be focused upon strategic decisions, not short-term tactical ones.  That means decisions that further the long-term objective of creating more growth potential for the company, not just satisfying short-term demands—whether those are internal or external.

Too many top executives are among the greatest offenders in this, largely due to the extraordinary pressure created by the stock market.  In fact, I believe the stock market and its “gambling mentality” is the greatest threat to American business today—even more of a threat than the U.S. government has tried to make itself.

Unfortunately, I hear CEOs so concerned about their stock performance that this concern starts filtering down to the ranks of staff.  This creates a frightening problem.  Lower-level staff, where most of the real strategic initiatives can originate, start thinking as the CEO does and slowly stop thinking strategically about initiatives that will sustain growth.

Since the top of the company has become so focused upon tactical response to stock market performance, the company has actually been turned upside-down with mid- and lower-level staff becoming the real source for strategic growth.  Can a company actually survive being driven from the bottom up, especially if mid-level staff start thinking about stock price as a real goal for their initiatives?  This creates a terrible problem of both how to train these staff to become more effective in a strategic role, how to nurture strategic thinking from lower levels, and how in that environment to still maintain a proper management hierarchy.

Got answers?

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