Start Up Stories

“What Are The Obstacles to Sales?”

Posted in Uncategorized by Devon on May 31, 2009

I recently met with one of my former professors of entrepreneurship at MIT, Ed Roberts. Ed reminded me of the risks of introspection in writing these blogs. The fact is, each start-up has unique people, problems, and opportunities which makes it hard to generalize and therefore offer reliable advice. Ed’s been working on this problem a lot longer than I have and I respect his views. That said, I am reminded that the questions are really much more important than the answers anyway — and there is one question that I always found relevant to any business… “What are the obstacles to sales growth?”

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Working for a Start-Up for Low Pay – Part 2

Posted in Uncategorized by Devon on May 11, 2009

After some feedback on last week’s post, I am reminded that lots of people without financial backgrounds work for start-ups so, it’s probably worth reviewing a couple of pay-related ideas again, to help people understand how to think about pay and start-up equity or stock options. First off, your labor is valuable – assuming you can get a job somewhere else, and ought to be valued at market rates. Secondly, it’s likely that you’ll be offered common stock or stock options in return for being paid below market rates. The question of whether it’s stock or stock options, and whether the options are qualified or non-qualified, is largely a tax question and the subject of a future blog entry. So, the main idea that I want to drive home here is that you’ve got to make sure that your below market wages are reasonably compensated with equity so that you are, in effect, making market rates. Make sure you have this compensation discussion knowing your market wage rate and the valuation on the firm. We’ll talk about firm valuation in a future blog.

1. Do you know what your labor is worth on the open market?
2. Do you know the fair market value of the start-up you are planning to work for and how many shares are out in fully-diluted equity?
3. Can you do the math to make sure that you are being compensated competitively?

Working for a Start-Up for Low Pay

Posted in Uncategorized by Devon on May 3, 2009

If you are planning to work for a start-up at below market pay, you ought to think like an investor. The basic idea that I think you want to follow is to value your labor at market rates (e.g. assume your alternative to a start-up is to get a job for $100K), then convert whatever you are taking below that market rate into equity. For example, if your market value is $100K/year but, the start-up can only pay you $50K/year, then you will need $50K in equity compensation for that year because you are, in fact, being asked to invest your labor capital into the business. Generally speaking, the value of a stock option – which is the right, but not obligation, to purchase the company’s stock at an agreed-upon price for an agreed-upon period, in an early-stage start-up company, is about equal to the value of the stock itself (if you want to see the math underlying this principal, send me a note -).

Therefore, in the example above, you will need $50K in cash + $50K in stock or stock options, all of which vests by the end of the first year – to be whole. The value of an option to buy one share, if you assume it is equal to the value of one share of stock – as we have done, is of course – related to the value of the company and the number of shares outstanding. For example, if the total number of shares of all classes of stock in a company, including stock options, is 1,000,000 and the company is worth $1,000,000 – then the value of each share is $1. So, in order to value a stock option, you’ll need to value of the firm and what is called the “fully-diluted equity” of the company – a fancy word for how many shares will make a claim on the value of the company if sold (1,000,000 shares in our example above).

The value of a funded start-up is approximately the value of the firm, after the money was invested, at the last financing round. For example, if a firm is worth $1,000,000 before an investor makes an investment and an investor invests $1,000,000 into the firm, the firm will be worth $2,000,000 after the capital injection and the investor will own ½ the company ($1,000,000 invested out of a $2,000,000 total value). So, you’ll want to ask about the post-money valuation at the last round and the fully-diluted equity in the firm. With these 2 numbers, you can determine the value of a share of stock or an option share. Again, in the example above:

The company is worth $1,000,000 and has 1,000,000 shares outstanding
An investor buys 1,000,000 shares for $1,000,000
The firm now has $1,000,000 more cash in the bank and 1,000,000 more shares outstanding.
The firm is now worth $2,000,000 and has 2,000,000 shares outstanding, all else being equal, a share is still worth $1 ($2,000,000/2,000,000 shares = $1/share)

That said – get a hold of these numbers, establish the value of a share, and make sure that you are compensated for your labor – appropriately, with equity compensation (e.g. $50K worth of stock in the above example per year of work) that’s equivalent to the cash compensation you are effectively investing in the business. If the firm hasn’t been externally financed, it’s valuation is the subject of a future blog…

Are you getting equity for the market value of your labor investment?

What Would That Look Like?

Posted in Uncategorized by Devon on April 26, 2009

It’s late November in New England and there is a real chill in the air – winter is near now. We were starting to talk to capital providers but our business model isn’t quite baked yet so we can’t yet define, “What would the perfect round of capital look like?” As I think back to my first start-up, I realize what a good decision we made in selecting investors and a board that really understood the business we were going into; their advice was invaluable in subsequent years. Remember to first define what the perfect round would look like in simple terms (e.g. We need semiconductor industry executives and technology VCs to build this business), then set about finding those people.

Can you articulate what an intelligent round of capital would look like for your business in a sentence or two? If not, try again before starting to raise money.

Put People Stuff First

Posted in Uncategorized by Devon on April 20, 2009

It’s late November and Thanksgiving is nearly upon us with the promise of good food and good company. I see two people-related matters in my notes that are, well — worthy of note. First, if you plan to issue stock options as a form of compensation, I’d suggest you incorporate immediately as a C-corporation; issuing options from an LLC is a less traveled path than a C-corporation option. Second, I see that I was still putting people-related issues (e.g. straightening-out compensation, reviews) first on my list of things to do; a very good idea which pays big dividends. If you take care of your people, they will take care of your customers and your customers will take take care of your shareholders. As the CEO of a start-up, if you have people, take care of them first! The customer comes second.

Do you put taking care of your people first on your weekly to-do list? If not — you’d better rethink your priorities. If you don’t take care of your people, who will? And if you lose your employees, who will take take care of your customers?

Are You Doing Your Job Coach?

Posted in Uncategorized by Devon on April 13, 2009

It’s November in New England and Thanksgiving is fast approaching. I see that I was already starting to review partners. I took a class with Jack Welch at Sloan and wrote, in my class review, “I am astonished at the lack of candor, and its corresponding opportunity cost, in the world around me now having been in Jack’s class. Many people just don’t give their peers the feedback needed to improve personal effectiveness. Certainly, I am redoubling my own efforts to be direct, immediate, and honest with the people in my life.” Candor and communication are really critical, ESPECIALLY IN A STARTUP! It may seem odd to conduct regular formal reviews in a start-up but, it isn’t. Start-ups are pressure-cookers demanding every ounce of creativity, energy, skill, and personal commitment everyone has to offer. This is exactly the environment where routine thoughtful, direct, and honest communication is crucial.

When was the last time you invested the time to conduct performance and values reviews with your partners and/or employees? If it’s been more than 3 months – you aren’t doing your job as head coach.

“The way to succeed is to double your error rate”

Posted in Uncategorized by Devon on April 6, 2009

It’s November in New England and a chill grips the air. We are starting to accelerate down our new business path. Looking back is interesting… I almost want to scream at my own notes and say, “Damn it! Can’t you see it! You are so close!” That’s the nature of research, however – the answer can be right beneath your nose and you still can’t see it. That’s why it’s so important to work with a diverse group of smart people who see things from different angles.

Looking back now, I also see how incredibly important it is to set and achieve goals in an R & D setting. Delivering results – even if unexpected, is so critical to R & D progress. I now see, in even greater focus, the wisdom of Venkat’s weekly software development sprints; they force progress!

Does your R & D organization set weekly goals and report progress to plan or do they hide behind, “The creative process doesn’t operate on a timeline…you just don’t understand R & D”? If it’s the latter, you need someone else to run R & D.

Oh, We Call That A Wicked IT Problem

Posted in Uncategorized by Devon on March 30, 2009

It’s late October in New England and wet leaves squish beneath my heals as I exit the Kendall Square T-station. Merritt and I are working around the clock to meet a commitment we’d made to a potential investor. We would keep our promise and ship the business plan on-time. The plan itself was well crafted but would have some remaining strategic problems. We would ultimately solve these problems but, the plan would mark a key shift in strategy which would ultimately point the firm in an entirely new direction; the killer application we would ultimately execute on.

I remember this feeling from another start-up — that sense that an old business model is dead and a real killer application has come into view; it’s a great feeling though the transition from founding principles can cost a night’s sleep or two. The great news is what took me 3-4 years to figure out 20 years ago, took 4 months this time – that’s progress.

The question here is, “Do you have a set of reliable sign-posts that will tell you that you are on the right path? What would it look like if you were headed in the right direction?”

One way to know that you’ve taken the right turn is to ask your prospective customers if they have a name for the problem you solve. If they do, rejoice and follow the scent – you’re probably on the right road!

Does This Make Sense Yet?

Posted in Uncategorized by Devon on March 22, 2009

It’s fall in New England and we are wondering what we’ll be for Halloween. One of the purposes of assembling a company board is to force executive management to articulate strategy and progress against strategic goals. This act of “scheduling an articulation of strategy” is particularly important in early-stage technology start-ups where customer interaction is limited due to product development constraints. However, board meetings DO NOT replace the need to connect with the market at the earliest possible moment in support of the goal of transferring the financing of the enterprise from investors to customers! Nevertheless, assembling a board early is a good idea.

When was the last time you had to articulate your strategy and progress to 6-7 astute outside business people?

Early Business Model Work Belongs In The R&D Line

Posted in Uncategorized by Devon on March 15, 2009

It’s October 12 and I’ve asked Merritt to help me write the business plan; a very good move. It will turn out that we’ve enough brain power, analytical skills, and business experience to build 2 completely different business plans in about 2 1/2 weeks. What we will find in this next 2 1/2 weeks will profoundly change the direction of the firm. In fact, we will abandon the premise upon which the firm was founded and start down a completely different track. In my previous start-up, as someone initially trained as a biologist/chemist, I didn’t have business skills to test business models as I do now – this is a critical time-saving skill-set and having 2 well-trained seasoned executives saves even more precious time.

It’s really true that having business people, in addition to product/technical people, around in the early phases of a business is critical to conducting what I’d call “business model R&D”. I’ve heard early-stage, primarily technically-trained entrepreneurs make derisive remarks about MBAs and frankly, it’s the wrong attitude, business model R&D is just as important as product R&D.

Do you have business people on your team conducting business model R&D?