Buyback of Founder Shares

by Suzanne Dingwall Williams

If you're in Quebec in winter (and it pretty much always IS winter in Quebec), nothing goes down better than a bowl of poutine. Poutine is a combination of french fries, cheese curds and gravy. It's a regional dish, and only Quebecois can make it well. This hasn't stopped many avant-garde restaurants and fast food chains from trying; it's on the menu in New York and Chicago, and the fast-food chain Harvey's tries to sell it,too. I don't blame them, but here's the thing: poutine just doesn't work out of context. In fact, removed from the charm of a candlelit apre-ski chalet, it's a tub of fairly nasty, congealed stuff.

The return of VC investors to angel and seed investing has led to a number of investing terms that, while they can make sense at the Series A stage, don't fit well in an earlier stage investment. For me, these are just so much financial poutine, and need closer consideration before you place your order.

Poutine #1: Buyback of founder shares. In a Series A deal, investors typically require founders to agree that a portion of their shares may be bought back if the founder leaves the company (or is fired) within the first few years following the investment. One underlying rationale of the Series A buyback is that the founders may not be the right team to scale the business, once the product and market have been de-risked by seed money. When negotiating this term, I always advise founders to insist that the number of shares subject to the buyback must be reduced in certain circumstances - most importantly, if the board fires the founder without cause. (You can read lots more on the topic by Nivi and the lads at Venture Hacks. There also are a number of other subtleties to this term, but let's leave that for another post).

In an angel/seed investment, the need for acceleration to protect a founder is even more compelling. In my experience, the period between seed and Series A is when most differences between investors and founders (and founders and founders) emerge. A broad right to buyback founders' shares at this stage can incent investors to replace founders who don't get along rather than trying to resolve issues. It can also incent investors to remove founders earlier, in an attempt to recapture equity that can be reallocated on a less-dilutive basis to post-Series A hires. (This raises the interesting legal question as to whether investors who exercise this right after firing a founder without cause are engaging in oppressive shareholder conduct. Lawyers for ex-CEOs ousted by VCs have advanced a number of interesting argumentss over the last few years along these lines. Since most of these cases have settled in Canada, there presently is little case law on the matter.)

To balance the incentives created by a buyback, I often advise clients to insist that NO shares will be bought back if the founder is terminated within the first year following the investment for reasons other than cause. If a founder steals from the Company, that's one thing. But unless the investment is a back-of-the-envelope kind of deal, any issues with founders should have been sussed out in due diligence.

As a founder, you might well agree that, if you leave the business and your angel investors high and dry, then they should be able to buy out most of your stake. But tread carefully when you extend that right. Ask yourself whether you are comfortable with forfeiting up to 75% of your stake in your company the day after you close an investment. Make sure your lawyer is fighting this point for you.

7 Uncommon Questions I'd Ask A Startup If I Were A Venture Capitalist 

"Bite!": Your story needs it (to get the money)

by John L. Nesheim

"It doesn't have 'bite' " said the VC partner.

The founder and core team sat in silence. They had come to try out their presentation of the startup's business plan as part of preparing to raise a large B round. Their startup is doing amazing things and has multi-billion dollar potential. But less than a minute into the trial presentation the VC's exclamation leaped out at them.

The discussion that followed turned into a workshop with everyone innovating and making suggestions. The result was a much more compelling story, from the first to the last slide. It took a lot of hard work and experience to get to a successful conclusion. But at the end of the morning, the story had "bite."

I believe your story will not get the money unless it has bite. Nor will it attract great employees. Nor will it get bloggers or end users excited. You have to have it. It's a sign that you have an unfair competitive advantage.

So what is "bite?" These are what I think it is about:

• Bold. Your claim to fame must be bold. Shocking is overdoing it.  Boring is death.
• Story. It must be a story. Stories are attractive. They are interesting. They stir emotions. They have beginnings and plot and intrigue, and a happy ending for the heroes.
• Emotion. You must stir emotions with your story. Use facts but more than facts. Use facts to trigger emotions.
• Poignant. Your idea needs to treat a significant pain. A pain being suffered by the end user. That is what is meant by a compelling value proposition. The listener must feel the pain and respond poignantly.
• Grabs. Your story has to grab the attention of the listener. Like a hand that reaches out and pulls the listener into the room. Swiftly and powerfully.
• Believable. It has to be believable. That is where you win or lose. Realistic carries the day. Able to do an amazing thing. Wow!

BOTTOM LINE: Test your idea. How much bite does it have? Is it a bold story that triggers emotions, stimulates a poignant response as it grabs the listener who at the end of the tale believes you can do it? When you have that, you are ready to tell your story. Then you'll have built a powerful element of your unfair advantage.

Vesting Your Own Shares

by Venture Hack

Don't agree to vest all of your shares just because it is supposedly "standard". Get vested for time served building the business.

Your Series A investors will ask you to give all your founder's shares back to the company and earn your shares back over four years. This is called vesting — see Brad Feld's article on vesting if you need a primer.

Vesting is a good idea:

You are critical to the company and you have told your investors that you are committed to the business. They are simply asking you to put your shares where your mouth is: a vesting schedule demonstrates your commitment to the company.

Vesting also ensures that a co-founder who leaves the company early doesn't receive the same amount of equity as co-founders who stay in the business.

Get vested for time served building the business.

But don't agree to vest all of your shares just because it is supposedly "standard".

If you have been working on the company full-time for one year, 25% of your shares should be vested up-front and the balance of your shares should vest over three to four years. The best vesting agreement we have seen for a founder in a Series A is 25% of shares vested up-front with the balance vesting over three years.

You should argue that,

"New employees who join the company today will earn all their shares over four years. Employees who are already here should be credited for their time served."

We don't recommend trying to escape a four-year commitment to the company (including time served). Four years is the typical commitment for a start up, high school, or college, as well as the span between Olympics and World Cups, and the term we give our Presidents to start as many wars as possible.

Consider cliffs for newfound co-founders.

One-year cliffs are typical for employees but are currently rare for founders.

Nevertheless, consider negotiating one-year cliffs with newfound co-founders whom you haven't worked with in the past. If a co-founder leaves the company after three months, you don't want him walking out the door with a large chunk of the company.

You made a commitment to the company by agreeing to a vesting schedule — the company should reciprocate and commit to you by granting acceleration upon termination.

Over time, your continuing contributions to the company will become relatively less important to its success. But the number of shares you vest every month will stay relatively large. Founders generally make their greatest contributions at the early stages of the business but their vesting is spread evenly over three to four years.

As your relative contribution to the company diminishes, everyone at the company has an incentive to terminate you and benefit ratably from the cancellation of your unvested shares. Nevertheless, in our experience, founders are allowed to vest in peace unless they are incompetent, actively harmful to the business, or clash with a new CEO.

You will probably be terminated if you clash with a new CEO.

By definition, a new CEO is hired to change the way things are and provide new leadership to the business. That he might clash with founders who previously ran the business is predictable. The CEO usually wins any disagreements or power struggles — he is the decider and he decides what is best.

The investors, board, and management will almost certainly agree to fire your ass if you continuously clash with a new CEO and you will lose your unvested shares upon termination.

Accelerate your shares if you are terminated.

50% to 100% of your unvested shares should accelerate if you are terminated without cause or you resign for good reason.

Cause typically includes willful misconduct, gross negligence, fraudulent conduct, and breaches of agreements with the company. 'Clashing with the CEO' is not cause. Good reason typically includes a change in position, a reduction in salary or benefits, or a move to distant location. Detailed definitions are included in the Appendix below.

Make sure you receive this acceleration whether or not your termination or resignation is in connection with a change in control of the company, such as a sale of the business. You can clash with your acquirer too.

Justify acceleration with the reciprocity norm.

Acceleration may cause consternation among your investors but it is easy to justify:

"A founder's most important contributions generally occur in the early stages of a business but he earns his shares evenly over time. If I clash with a new CEO and he terminates me, I should receive the equity I earned with those contributions. Which will make me much more comfortable with hiring a new CEO.

The founders agreed to a vesting schedule to demonstrate our long-term commitment to the business. You have told us that the founders are critical to the company — that we are the DNA of the business. Acceleration demonstrates the company's long-term commitment to our continuing contribution."

This argument is an application of the reciprocity norm which requires your opponent to be fair to you if you are fair to him. Your vesting schedule locked you into a commitment to the company — that was fair — now acceleration locks the company into a commitment to you.

It is even easy to justify 100% acceleration if you are the sole founder of the business:

"Right now, I own 100% of my shares. After the financing, I will have to earn these shares back over the next four years — I've agreed to that. But if I'm removed from the business, I lose the right to earn my shares back. In that case, I should walk out the door with the shares I came in with."

Avoid unfair termination with a democratic board.

As usual, the best way to avoid unfair termination and avoid hiring a bad CEO is to create a board that reflects the ownership of the company with hacks like making a new board seat for a new CEO.

Acceleration for co-founders can do more harm than good.

If you have a team of founders, acceleration upon termination can do more harm than good.

A co-founder with acceleration upon termination who wants to leave the company can misbehave and engender his termination. If the company decides to terminate him without cause to avoid possible lawsuits, your co-founder will walk away with a lot of shares. In California, it is actually very difficult to prove cause unless an employee engages in criminal activity.

If you trust your co-founders absolutely, you should negotiate as much acceleration upon termination as you can. Otherwise, you need to decide which is worse: the expected value of misbehaving co-founders who leave with a lot of shares or the expected value of leaving a lot of shares behind after your termination.

Appendix: Definitions of 'Cause' and 'Good reason'.

Your lawyers will help you define cause and good reason. Definitions that we have used in term sheets in the past follow. Note that the definition of good reason below assumes the company plans on hiring a new CEO at some point:

"Cause" shall mean the occurrence of:
1. The willful misconduct or gross negligence in performance of his duties, including his refusal to comply in any material respect with the legal directives of the Company's Board of Directors so long as such directives are not inconsistent with a party's position and duties, and such refusal to comply is not remedied within ten (10) working days after written notice from the Company, which written notice shall state that failure to remedy such conduct may result in termination for Cause;
2. dishonest or fraudulent conduct, a deliberate attempt to do an injury to the Company or the conviction of a felony; or
3. breach of the Proprietary Information and Inventions Assignment Agreement entered into with the Company.

"Good Reason" shall be deemed to occur if:
1. 1. there is a material adverse change in employee's position of employment causing such position to be of materially less stature or of materially less responsibility, including without limitation, a change of title or responsibilities normally associated with such title, without employee's consent (other than, with respect to the Founder(s), a change, in connection with the appointment of a new CEO, to an executive officer level position with normally associated responsibilities that reports directly to the CEO or the Board of Directors),
   2. there is a reduction of more than ten percent (10%) of employee's base compensation unless in connection with similar decreases of other similarly situated employees of the Company, or
   3. employee refuses to relocate to a facility or location more than sixty (60) miles from such employee's principal work site; and
2. within the one (1) year period immediately following such event the employee elects to terminate voluntarily his employment relationship with the Company.

Negotiate some acceleration if you sell the company ahead of schedule — you don't want to stay at the acquirer for an unreasonable period of time. Also negotiate 100% acceleration if the acquirer terminates you and deprives you of the ability to vest your stock.

Your vesting should accelerate upon a change in control of the company, such as a sale of the business.

Negotiate both single and double trigger acceleration.

Your options for acceleration upon a change in control, from best to worst, include

1. Single trigger acceleration which means 25% to 100% of your unvested stock vests immediately upon a change in control. Single trigger acceleration does not reduce the length of your vesting period. It only increases your vested shares (and decreases your unvested shares by the same amount).
2. Double trigger acceleration which means 25% to 100% of your unvested stock vests immediately if you are fired by the acquirer (termination without cause) or you quit because the acquirer wants you to move to Afghanistan (resignation for good reason). The hack for acceleration upon termination already provides double trigger acceleration and provides sample definitions of termination without cause and resignation for good reason.
3. Zero acceleration which is a little better than getting shot in the head by the Terminator:

The most common acceleration agreement these days combines 25% - 50% single trigger acceleration with 50% - 100% double trigger acceleration. The median of this range is probably 50% single trigger combined with 100% double trigger.

Justifying single trigger acceleration.

You can justify single trigger acceleration by arguing that,

"We didn't start this company so we could work at BigCo X for two or three years. We're entrepreneurs, not employees. We're willing to work at BigCo, but not for that long.

If we sell the company after two years, that just means we did what we were supposed to do, but we did it faster than we were supposed to. The investors will be rewarded for an early sale by receiving their profits earlier than they expected. We shouldn't be penalized for an early sale by having to work at BigCo for years to earn our unvested shares.

Single trigger acceleration reduces the effective time we have to work at BigCo and rewards us for creating profit for the investors ahead of schedule."

Justifying double trigger acceleration.

You can justify 100% double trigger acceleration by arguing that,

"The aim of vesting is to make me stick around and create value — not to put me in a situation where I am deprived of the opportunity to vest because I am terminated for reasons beyond my control or I resign because the environment is intolerable.

So, if I am terminated with no cause by the acquirer, I should vest all my stock. Or if the conditions at the acquirer are intolerable and I resign for good reason, I should vest all my stock."

The risk of termination at an acquirer is much greater than the risk of termination in a startup. Investors are generally investing in the future value of a startup — they're investing in people. Acquirers are generally investing in the existing value in a startup — they're investing in assets.

Acceleration agreements give you leverage upon a sale.

When you sell a company, the acquirer, founders, management, and investors will renegotiate the distribution of the chips on the table. It isn't unusual to renegotiate existing agreements whenever one party has a lot of leverage over the others. To quote the fictional Al Swearengen,

"Bidding's open always on everyone."

Negotiating your acceleration agreement now gives you leverage in this upcoming multi-way negotiation.

If an acquirer doesn't like your acceleration agreement, they can decrease the purchase price and use the savings to retain you with golden handcuffs. A lower purchase price means less money for your investors. This provides you with negative leverage against your investors — you can decrease your investor's profit if you refuse to renegotiate your acceleration.

Or, the acquirer can increase the purchase price in return for reducing your acceleration. A higher purchase price means more money for your investors. This provides you with positive leverage against your investors — you can increase your investor's profit if you agree to renegotiate your acceleration.

Visible contributors benefit the most from the renegotiation.

After this renegotiation, the CEO and key members of the management team often end up with better acceleration agreements than everybody else. That's not a big surprise — the CEO is leading the renegotiation.

Founders who are perceived as major contributors by the board and acquirer may also benefit from the negotiation. If you're the Director of Engineering, you're probably invisible to the acquirer — if you're the VP of Engineering and involved in the negotiations, you may do much better.

As always, the best defense against these shenanigans is to create a board that reflects the ownership of the company and to make a new board seat for a new CEO.

Appendix: Definition of 'Change in Control'

A sale of the company is an example of a change in control. Your lawyers will help you define change in control. A definition that we have used in one term sheet follows.

"Change in control" shall mean the occurrence of a sale of all or substantially all of the Company's assets or a merger or consolidation of the Company with any other company where the stockholders of the Company do not own a majority of the outstanding stock of the surviving or resulting corporation; provided that a merger, the sole purpose of which is to reincorporate the Company, shall not be treated as a change in control.

Supersize your vesting with microhacks

1. Reclaim a terminated co-founder's unvested shares.

A terminated co-founders unvested shares are typically cancelled. The resulting reverse dilution benefits the founders, employees, and investors ratably.

Instead of canceling the shares, divide them among the remaining co-founders and employees ratably. You should argue that,

"Cancelling a terminated co-founders shares puts a lot of pre-money into the investor's pocket. Those shares should be distributed among the founders and employees who created that pre-money valuation."

This argument will carry more water if you offer to put a portion of the reclaimed shares into the option pool to hire a replacement for the co-founder.

Reclaiming a terminated co-founder's shares does not create an incentive for co-founders to terminate each other. Co-founders have an incentive to terminate each other even if the shares are cancelled. In our experience, this incentive is never a factor. Founders are almost always allowed to vest in peace unless they are incompetent, actively harmful, or clash with a new CEO.

2. Run screaming from the right to purchase vested stock.

Some option plans provide the company the right to repurchase your vested stock upon your departure. The purchase price is 'fair market value'. Guess whether the definition of fair market value is favorable to you or the company…

Founders and employees should not agree to this provision under any circumstances. Read your option plan carefully.

3. Accelerate your vesting upon hiring a new CEO.

If you are having trouble applying any of the other vesting hacks, trade those chips in for six months of acceleration upon hiring a new CEO. Investors are usually eager to bring in "professional" management. They should agree to this term because it aligns your interests with theirs.

4. Keep vesting as a consultant or board member.

If you have a lot of leverage, you may be able to negotiate an agreement to keep vesting if you are terminated but retained as a consultant or a board member. For example, the company may terminate you but keep you as a consultant to help decipher your spaghetti code.

Some companies have been known to sneak this term into their closing documents. We're not big fans of that approach.

Again, if you are having trouble applying any of the other vesting hacks, you may be able to trade those chips in for this one.

Sequoia's Gospel of Startups More True Than Ever

by Michael Arrington

If you are an entrepreneur seeking a moment of clarity, there is no better place to start than Sequoia Capital's Elements of Sustainable Companies.

It's not new - these are the principles that

have driven Sequoia's investment strategies for decades. But today, with troubled financial markets beginning to spread cancer-like into Silicon Valley and venture capitalists starting to pull back from two plus years of carefree spending, startups have little wiggle room for error. This list is a beacon to help guide startups through their most common early mistakes.

We were reminded of the list recently when one of our interns, Bryan Scott, wrote an article talking about how important those ideas are to him. I informally polled some of my entrepreneur friends yesterday and today and was surprised at how few of them had read the list.

These principles are not for every new business, but they are certainly the key drivers of success for any startup looking for venture capital to drive growth. I've talked about some of these ideas in past posts, but nothing hits home quite as powerfully as a simple list, written by the venture firm that funded startups like Apple, Google, Yahoo, Cisco Systems, Oracle, PayPal and YouTube. Being able to put a check mark next to each item below certainly doesn't ensure success. But ignoring them is a sure way to fail.

I consider this essential reading for any aspiring entrepreneur, along with The Man In The Arena.

Elements of Sustainable Companies
Start-ups with these characteristics often foretells the success of a business and the likelihood of it becoming a sustainable, enduring company. We like to partner with companies that have:

Clarity of Purpose
Summarize the company's business on the back of a business card.

Large Markets
Address existing markets poised for rapid growth or change. A market on the path to a $1B potential allows for error and time for real margins to develop.

Rich Customers
Target customers who will move fast and pay a premium for a unique offering.

Focus
Customers will only buy a simple product with a singular value proposition.

Pain Killers
Pick the one thing that is of burning importance to the customer then delight them with a compelling solution.

Think Differently
Constantly challenge conventional wisdom. Take the contrarian route. Create novel solutions. Outwit the competition.

Team DNA
A company's DNA is set in the first 90 days. All team members are the smartest or most clever in their domain. "A" level founders attract an "A" level team.

Agility
Stealth and speed will usually help beat-out large companies.

Frugality
Focus spending on what's critical. Spend only on the priorities and maximize profitability.

Inferno
Start with only a little money. It forces discipline and focus. A huge market with customers yearning for a product developed by great engineers requires very little firepower.

How Does A Small Angel Investment Impact a Future VC Round?

by Brad Feld

Q: Say I have an angel (SEC accredited) who's ready to invest at an amount well below $100k. How would this impact on a future round with VCs? Is there some standard or average pre-money and post-money that happens in angel deals? Also, the angel in question is a family member of a friend, so would it be better to have them invest as a family/friend financier rather than an angel, and how exactly would that work?

A: (Brad) Let me address the last question first.  There is no real difference between a "family/friend" investor and an "angel" investor other than semantics.  Structurally and functionally they are doing the same thing.  Now - there might be an emotional difference when you have to see your "family" at Thanksgiving, but that's it.

Regarding how a VC will view this, sophisticated VCs are used to having angel investors as early investors in your company.  Your life will be made easier if you treat the angel investment as a real investment and document it legally as such - I've written about this in What's The Best Structure For A Pre-VC Investment. 

Assuming that you are planning on raising VC money some time in the future, there are two different typical structures for the first angel financing: (1) convertible debt and (2) preferred equity.

Convertible Debt: This is the easier approach of the two.  In this case, the investment is in the form of a promissory note that converts into equity on the terms of a "qualified financing" (where qualified financing typically is defined by having a minimum amount – say $1m of total investment.)  The note will either convert at a discount to the price of the qualified financing (usually in the 20% – 40% range), will have warrant coverage (usually in the 20% to 40% range), or both.  This discount and/or warrant coverage gives the angel investors some additional ownership in exchange for taking the early risk.  This note should be a real promissory note with the conversion and redemption characteristics clearly defined to protect both the investors and the entrepreneurs from any misunderstandings.

Preferred Equity: This is also known as a "light Series A" – it's preferred stock that is similar to that a VC will get, but usually with lighter terms due to the relatively low valuation associated with it.  For a very young company, a $500k investment can receive between 25% and 50% of the equity in the company and, as a result, many of the terms associated with a typical VC investment are overkill. 

While either of these work, you’ll find some angels that strongly prefer one over the other.  In addition, if you don't believe you are going to raise additional VC money and will only be relying on additional small angel-type investments, the preferred equity approach is fairer to the investors as they'll more clearly be participating in the upside on terms that are agreed to early in the life of the company.

Insuring that your angel investors are accredited is important as this is likely one of the things that will matter to the VC.  If your angels can be specifically helpful to your company (because of their background / experience in companies similar to yours) you should make sure the VCs know about them.  In addition, you should try to enlist your angels in getting you connected to VCs that they know and have worked with.

Finally, there is no standard pre-money/post-money in angel deals.  We typically see pre-money ranges between $1m and $3m for angel deals, but they occasionally go higher and sometimes go lower.  Be careful not to price the angel round too high as the VCs are going to likely ignore the angel round pricing and - if they price their round lower - it can be a difficult conversation with the angels who supported you early on.

Serial vs. collective board communication

by Seth Levine

Board communication has been the topic of a handful of conversations over the past few weeks as several of the companies I work with have grappled with both the right level of communication as well as the correct forum for certain board level discussions and decisions. 

Although there are a handful venues in which boards communicate, fundamentally they fall into one of two categories: conversations between a subset of the board (often just the CEO and an individual board member) and those that involve the full board.  While there are some decisions that must clearly be made by the full board at properly noticed board meetings (and documented as such) there are many more day-to-day decisions that either do not, or fall into a gray area where gaining board 'consensus' might be accomplished in different ways (or may not even be required at all).

Before I go on, let me pause to say that not only am I not a lawyer - I'm definitely not YOUR lawyer.  Decisions around proper company governance should be made in consultation with company counsel who can provide you with specific guidance around what decisions need to be made by the full board and the proper ways to obtain board consent on those matters.

My view on board communication is actually pretty straight forward in that I believe that a mix of serial (one-on-one) and collective communication styles is appropriate (although I recognize that some of my venture colleagues skew significantly to one side or another).  Certainly CEO's and management teams should feel free (and be encouraged) to reach out to specific board members to get operational and day-to-day tactical advice.  Topics for these conversations can range from prep for an important customer meeting, advice on a strategic alliance or partnership, thoughts on a marketing initiative, etc.  They should also regularly 'check-in' with their board members to make sure that they are communicating regularly (and getting feedback as necessary about both the business and their board management).  These conversations are natural places for soliciting tactical business feedback as well as preping for group decisions that are upcoming.

I draw the line on these conversations when they start to enter the realm of board decisions rather than board input (and even in the case of board input, there are some topics that really should be discussed openly with the board as a whole).  I'm generally NOT in favor of CEO's serially calling all board members either for the purpose of gaining buy-off in the absence of a group communication or for the purpose of "pre-wiring" a board call (essentially lobbying the board before the have a chance to talk together). There's incredible value in the actual board discussion and in many cases someone comes up with an idea that either influences the group decision or triggers a thought by another board member that wouldn't have otherwise come up.  There's definitely risk in this - a CEO needs to be comfortable with more far ranging conversations and open to real disagreement.  Of course, most good CEO's embrace these sorts of conversations and have a good governor based on run-time with their board what decisions really require some kind of parallel discussion vs. those that don't. 

One thing that significantly helps reduce the potential for problems is making sure that you are regularly communicating to your board collectively between meetings.  Regular business updates will ensure that even if you couldn't connect with several of your board members everyone is fully up to date.  Its also a place to gain basic group feedback on topics that for one reason or another came up with only some board members and which deserve some amount of group consideration ("I spoke with George this week about XYX; he suggested ABC; I'd appreciate your thoughts on this subject as well.").

With a little thought and planning as well as at least a short, regular (at least bi-weekly) check-in will go a long way towards avoiding the problems that arise when your board feels that important decisions are being made without their full input or counsel.

Are Venture Capitalists incompetent or just inconsiderate?

by Jason Mendelson

Not all venture capitalists mind you, just the ones who solicit your proposal, read your executive summary, or even meet with you, and then you never hear another word from them. What's up with that?

There is a subset of the VC community that will just go silent at some point and you never hear from them again. I have raised venture funding for a few companies, and I would estimate this number at around 10-20% of all the funds I have approached. The Berkshire Hathaway annual report's Acquisition Criteria section always contains the quote, "When the phone don't ring, you'll know it's me." But that only applies where someone looking for funding doesn't do their homework and sends in a proposal that doesn't meet their criteria.

The problem in the VC community is broader than that. I have seen potential investors go silent:

• After researching their investment criteria and seeing that we may be a good fit.
• After getting an introduction to the fund from a respected referral source.
• After communicating with a partner who said, "This looks interesting. I will look at your executive summary and get back to you."
• And even after having a conference call or face-to-face meeting to go through our business plan in detail.

If silence always meant rejection, then this wouldn't be such a problem, other than the fact that I waste my time making multiple calls or sending several e-mails to follow up. But silence doesn't always mean rejection. I have spent literally weeks trying to get a response from a VC, only to hear, "Thank you for being so persistent. We remain interested, but we've been swamped / we just closed our new fund / an investment committee member has been on vacation / etc." The process has then continued. So you can't just give up.

My strategy when I get the silent treatment has been to leave a series of three to five messages (depending on the quality of the introduction or level of previous engagement) with the last one politely saying, "This is the last time I'm going to call." But boy, what a waste of time this is. Entrepreneurs bust their butts and spend dozens of hours writing business plans, arranging investor meetings, and preparing and making presentations. Venture capital fund managers owe them the courtesy and respect of making a two-minute phone call to say, "No thank you."

That is indeed frustrating. So what's the deal? Here is my take:

I've always taken the approach (as does my co-author Brad) that you try to keep communication as efficient and responsive as possible. We regularly say that we will return any email that we get, but also caution that phone calls are much harder to return. I think there are two takeaways from this: first, whomever you are dealing with, try to find out their preferred mode of communication and two; I don't necessarily think that we represent the norm when it comes to responsiveness.

We also try to say "no" as quickly as possible to deals that we are evaluating in our pipeline that aren't going to be funded by us. There is no use keeping the entrepreneur on the hook if you aren't going to fund a deal and we try to come to the "no" decision as quickly as possible.

I agree, Frank, there is a lot of bad communication "mojo" in the venture world. In fact, I see it too. I've seen countless times where VCs have been unresponsive to entrepreneurs, other VCs, or even their own portfolio companies.

In fairness, keep in mind that most good VCs are reviewing a massive amount of emails, business plans and proposals, so there are times when one can get buried. Take for instance the situation where one of my companies is in the middle of a sale process, while I'm in fundraising mode and moving into a new office. (That actually happened to me last fall). I'm clearly going to get slower in responses, but this normally affects timing by days, not weeks, as you mentioned above.

Okay, I haven't answered your question: Are VCs incompetent or just inconsiderate? I think it's more of the latter than the former, but ineffective communication styles, in my opinion, will eventually affect a VCs returns as reputations do matter in this business.

Economic gloom hits the VC world

By Scott Austin

Each week, the fabric of our financial system further unravels to reveal vulnerable pockets of our economy. But somehow, venture capital -- one of the most powerful growth engines of the economy and the lifeblood of high-technology advances, as the National Venture Capital Association describes it -- has managed to avoid being associated with these words.

Isn't this, after all, the asset class that helped hype shoddy investments eight years ago through greed, deception and irrational exuberance, only to watch a misled public suffer while the economy spun into a lengthy recession?

For months, VentureWire tugged at the roots of venture capital to examine how the industry might be disturbed by the troubles in the financial markets.

But venture capitalists confidently shooed us away, repeatedly telling us their world is largely insulated from the credit problems. "Silly reporters, this busted bubble is different," they said. Sure, an economic slowdown, a drop in consumer spending and a tightening in the market for initial public offerings will put pressure on startup businesses.

But that's part of the cyclical nature of investing. Venture capitalists largely fund companies with equity checks, not loans -- they put cash in and get equity back. So there will be no crunches, crises, messes or meltdowns to speak of in venture capital.

They gave us little more than a shrug.

Unprecedented spasm

But three weeks ago, something unexpected happened. That shrug turned into a shiver.

At the Dow Jones VentureOne Summit conference on Feb. 26, four venture capitalists sat on stage in the opening panel to give their take on the state of the industry. Sonja Hoel Perkins, a managing director at Menlo Ventures, said that venture capitalists need to be aware of the "cracks of the economy," including the failure of auction-rate securities.

The failure of what? At the time, I wasn't terribly familiar with auction-rate securities, and as we soon found out, many venture capitalists and entrepreneurs weren't either. But these debt instruments made up a $330 billion market, and tons of corporations and wealthy individuals parked cash in them because they were marketed by banks as extremely safe investments, about the equivalent of cash.

The securities bear floating interest rates that reset in auctions every week or so, but a few days before the VentureOne conference, an estimated $60 billion of such debt failed to generate enough demand from bidders and the interest rates soared. This unprecedented spasm meant that many holders of auction-rate securities couldn't get their cash back.

Back at the conference, another panelist, Battery Ventures general partner Ken Lawler, sounded an alarm. He said his firm took a quick poll of his group of 60 or so portfolio companies and was shocked to that 12 of them, or 20%, have some amount of cash tied in auction-rate securities.

"I've been in business 22 years, and I've never seen anything like it," he commented. "Who'd have thought that triple-A rated, short-term securities you'd invest in would be completely illiquid? That's an indication something is up. ... Normally when you think about credit, you don't think about it affecting classic venture investing, but here it is coming out of left field, and it hurts."

The most interesting thing is the fact that self-assured venture capitalists were caught off guard.

It was the first public indication that credit woes are directly affecting startup companies.

We included Perkins' and Lawler's comments in a story that day for VentureWire that emphasized the concerns on venture capitalists' minds. But we didn't know enough at the time to indicate how widespread this problem was in the startup world. A few other VCs we talked to either said they hadn't heard of these securities, or their portfolio companies didn't have any cash in them.

Unfortunately, many blogs, such as TechCrunch, mischaracterized our story (without doing any reporting themselves) by ridiculously stating that "20% of Silicon Valley startups can't get to their cash." We decided to dig deeper to get to the bottom of the issue.

I chatted with Rebecca Buckman, the longtime venture-capital reporter for The Wall Street Journal, who was interested in doing a piece for WSJ and VentureWire to analyze how far this problem reaches in the venture community. Her story, the first in-depth piece to examine this issue, was published Friday. Read the article.

Startups in jeopardy

As the story goes, it appears that a large amount of startup companies indeed put chunks of their cash in auction-rate securities. This could have big consequences down the road if the market continues to seize up.

Unlike public companies, which can tap into sizable cash reserves to keep going, startup companies usually have little cash and short-term investments to play with. A lengthy delay in accessing that cash could cripple a startup's ability to fund operations and make payroll.

This story isn't close to being over. Venture capitalists only recently have awoken to this issue, and we've heard from several of them who say they too recently polled their portfolio companies and came up with some cases.

It's worth nothing that the startups' exposure to these securities varies greatly. Some only have a small percentage of cash in them, while others have much of it tied up. (Penny Herscher, the chief executive of startup FirstRain Inc., posted an interesting letter on her blog from one of her investors who rushed to inform its portfolio companies that their cash might be at risk. See the letter.)

No one's sure what the fallout will be. Lawyers are predicting that investment banks -- the ones who supposedly marketed auction-rate securities to be as good as cash -- will be sued over this. If startups end up losing money and are forced to shut down, it would be an historic event. But that's not likely.

Startups will likely begin seeking small loans from debt holders to get them through this period, with the auction-rate securities serving as collateral. They also may need to tap venture capitalists for a little more extra cash, even if that cuts into the startup's valuation. All of this becomes somewhat of a nonissue if the auctions kick back up soon.

No matter what happens, to me the most interesting thing is the fact that self-assured venture capitalists were caught off guard. Most venture capitalists don't meddle in the company's daily financial decisions. They'd likely have no idea if chief financial officers -- or, at some very young companies, those acting in the role of CFOs -- parked money into auction-rate securities. That's alarming to them.

Venture capitalists are finally coming to grips with the credit crunch and how it may indeed turn into a crisis for them if there's a widespread startup meltdown. A potential mess.

As an entrepreneur, "NO" from a VC is a good thing

创业者要的是明确意见，而不是含糊的托词。

by Steve Fisher

In the blogosphere, there is some buzz as to why VC's don't say no. There has been early writing on this topic, but Stu Phillips of Ridgelift Ventures and his entry, Getting to NO!, is getting a lot of buzz.

I would like to add the entrepreneur's perspective on the conversation.

In my experience, the VC's I have presented to and met with for the most part think of themselves as risk takers or the "rebels of the investment world". My perspective is that while this might have held true in the early days when people where investing in Apple and those first Internet startups, now it is mostly follow the leader.

This is one of the reasons many a clone of YouTube or MySpace to appear on the web and generate the froth in yet another new wave of startups. VC money for the most part does not chase true innovation, many pursue later stage with a clear exit or if it is early stage, they chasing deals with what I call "parallel potential" that emulate the successful pioneer.

This is why many companies getting funding sound very much like variations on the original (i.e. "this is MySpace for Retired People" or "this is YouTube for music videos" or "Google for vertical markets") there is a reason this happens. First, VC's who didn't get in on MySpace or YouTube believe they invest in one with similar features and have a good exit if its positioning makes it stand out. Enabling this co-dependent investment relationship are the entrepreneur's who are not really innovating and just see a niche that they can capitalize on and hope the VC is interested.

I look at a VC as a combination of Movie Producer and Casting Director. You are the actor/actress and winning the part is the equivalent to getting the investment. This means that you as the actor need to audition for the right parts and your company must match their type of portfolio investment or you are just wasting your time.

The value of a VC, a good VC that is, is to do as many "no harm/no foul" meetings to explore a potential investment. Many entrepreneurs think this is a YES/NO meeting. It is not. Think of it like a first round audition to see if your company fits their portfolio. If there is interest, you move to the next round.

I have experienced this first hand and for many investors, the real opportunities are ones that disrupt what exists on the market today or innovates in an area that can be marketed to a number of industries ensuring a safety net to reduce its risk relying on one sector or business model. Ironically, many VC's when they first see these deals are apprehensive to jump and say "Yes", but they will never say "No".

Most investors might have a no harm/no foul meeting with an entrepreneur, they are reticent to say no because they like what they are seeing but maybe the customers aren't there yet or they want the market to reach the idea and prove its viability. This is why you get the typical responses:

• "If you find a lead, give me a call"
• "It is a great concept, if you get a few key beta customers, come back and let's talk"
• For more of these little "nuggets", I direct you to Guy Kawasaki's "Top 10 Lies of Venture Capitalists".

If you are getting these kinds responses your frustration level is high and I know how you feel. You must look at this as - NO, NOT RIGHT AT THIS MOMENT. But why don't they tell you "NO"? It is because they want to stay in the game in case you do reach those milestones or other VC's begin to get interested and want you. Does this not remind you of high school and trying to be popular? Yeah, I thought so too.

For you entrepreneurs that read this blog, understand that for a VC, saying 'No' shuts them out of a future potential deal, but hearing NO can be good for both of you. Hearing "No" let's you focus on those VC's that either say "YES, let's continue" or "Not right now, but when you do X, let's move forward".

So here is my plea to the VC's that subscribe to the blog - BE HONEST. TELL US NO AND TELL US WHY NO. If we know why, we are happy to move on or update you later and come back to TURN THAT NO INTO A YES.

What is interesting is that this is not uncommon in other countries and is a standard way of doing business. Business etiquette in many countries do not use "NO" in their negotiations. China is a prime example of this where "Maybe" is as close as you are going to get and negotiations are always happening right up until the contract is signed.

What I recommend to you my fellow entrepreneurs is not to focus your business on making it a VC play. If you are building a good business, build a good business. True, some have amazing potential but a limited time window to execute so VC or angel investment is necessary to grow. If this is the case, the opportunity will present itself and the relationships you build will be there when you are ready.

Trust your gut when fundraising

by ari from NVA

This is the first post in what will become a series of short articles containing observations and experiences related to starting a company and raising money. Let us know if you'd like anything specific covered by commenting on the posts.

A recent experience with a VC reminded me of just how important it is to trust your instincts and be objective during the fundraising process. This can be pretty tough if you are raising money for your own company. Entrepreneurs by nature have to be optimistic creatures, because starting a company, especially one in tech, is a roller coaster of ups and downs.

VCs are all over the place with regard to how they communicate, set expectations, and respond to entrepreneurs so there is no real play book on how to read or react to the signals you might get. In a recent case, I decided to overlook a lack of responsiveness and lack of enthusiasm as a style issue. I decided that this VC just wasn't very proactive or open, and but convinced myself they were still seriously interested in the deal and it was worth pursuing based on the fact they were "saying the right things" when we did talk.

There were a number of occasions I'd hear "I'll give you a call this week", or "I'll follow up", etc and of course never hear from them unless I poked quite a bit. It has been said that dealing with VCs is like dating, and in this case it's a great analogy. If they say they are going to call and they don't, they just aren't that into you! I should have trusted instincts and quickly moved on, but I convinced myself that the deal would get done and we were getting enough positive signals to keep the relationship going. Despite popular opinion, VCs are people too, and some are transparent and up-front while others don't respond well to no-bullshit direct-questions. If you know who you are talking to and how they tend to operate it can help your read of the situation.

The real advice here is that as hard as it may be during a fundraising process, its important to take a step back and looking at situations as objectively as possible. If your instinct tells you something isn't right…listen to it. It will pay off in the end. Just like dating, BOTH people should want to be in the relationship for it to work.

Entrepreneur means you can't give up

by Mike Feinstein

Jeff Bussgang from IDG Ventures wrote recently about a breakfast sponsored by AlwaysOn to promote their upcoming AlwaysOn - East conference.  Jeff points out that many entrepreneurs play 'Blame the VC' when their business plans don't get funded.  It's true that some entrepreneurs are so enamored with their business plans that they feel that the VC who passes on the deal must be stupid.  And, if 50 VCs pass on the deal, they all must be stupid.  But, I haven't found this view to be very prevalent in the entrepreneur community.

I was at that breakfast, too (and had the pleasure of sitting next to Jeff).  My view of the entrepreneurs' tone was slightly different.  There were quite a few entrepreneurs who spoke up about the fact that their business plan had been funded, but not by Boston VCs.  Perhaps their plan was funded by angel investors, corporate investors, or the ever looming West Coast VCs.  I have some expereince helping out entrepreneurs whose plans I think deserve to be funded by VCs. Some of them have a lot of commercial traction.  Despite some introductions, Boston area VCs haven't moved ahead and funded these entrepreneurs.

But, these entrepreneurs aren't deterred.  They have raised money from angel groups and individual investors.  They are courting VCs that are out of town.  And, they have modified their plans to take less initial capital in order for them to prove some commercial viability before they go try to raise more money.

If these entrepreneurs succeed, it doesn't mean that Boston area VCs are dumb.  Maybe they are too conservative.  Maybe they don't understand the market segments that these entrepreneurs represent.  Maybe they are unwilling to back first time CEOs or willing to build out a team after they fund the company.  Maybe they can't justify a small initial investment.  The best entrepreneurs won't let this stop them.

Instead, these top entrepreneurs with their strong plans will let the marketplace show who is right.  There is a lot of capital out there from many sources.  A great entrepreneur has to be a great sales person.  If you can't sell your plan to anyone, then either you aren't good at sales or the plan really is flawed.  The whole world can't be dumb, can it?

Since we are raising money now for our new investment fund, I have a front row seat for these types of meetings.  Some of our target investors have strategies that don't line up with ours.  Others only look for funds with a certain profile that perhaps we don't meet.  It's our job to find investors who are the right match for our fund.  There seem to be more than enough out there of this type that we can get our fund off the ground.  We're very encouraged by the response and optimistic about our success.

But, if we aren't successful, it will be because of a shortcoming of our team or strategy, not the fault of our target investors.

How Do VCs Choose Who They are Investing In?

by Caroline H. Worrall

I was recently reading this comment on TheFunded.Com:

"As a funded CEO and as a careful observer of the venture market, it looks to me like a giant game of Roulette. When a new game begins, venture capitalists throw large sums of money at start-ups in a particular industry, just like throwing chips on numbers across a Roulette table. When the wheel starts spinning and the little white ball is rolling, more and more money gets thrown across companies in the chosen industry, until the table is brimming with chips and the dealer calls "no more bets." The ball lands, bouncing around for suspense, and the winners are called. As the table is cleared and a new game starts, a new industry is chosen, sometimes related and sometimes not.

This bizarre financing phenomenon makes some sense. Flooding an industry, like social networking or Web 2.0, with money helps raise industry awareness. Invested capital gets spread around between firms in an industry through licensing and other strategic deals. Venture partners learn the ropes as industry know-how and events emerge. And, covering the entire market with investments ensures that the one big winner will be venture backed. Having that winner in a VC portfolio makes up for all of the big time losses that the VC has racked up over the years, too."

Given my experience with the VC world, this is accurate and makes a lot of sense. If you are interested in raising venture capital, then it behooves you to be in a 'hot' industry. If you are not in a hot industry, you may still be able to find venture funding, but you will face significantly larger hurdles.

If you are part of the next new industry, you can get by with a less experienced team and a less developed business. If you are not, you will have to have a very experienced team, a great business plan, and a history of strong execution on that plan.

Another VC Quits: Will Price

中国的VC再忙着改换门庭，约募越多、越做越大；美国的VC在忙着创业，约做越小。

by Alexander Muse

Last week I wrote a post titled, "Venture Capital's Brain Drain" where I suggested that more than 25% of venture capital partners I knew were quitting the VC business.  Mike Arrington has the scoop on Will Price's departure from Hummer Winblad.  Price explains his decision:

"For those of you who read my blog, you know that I am passionate about the venture capital industry and its importance in supporting innovation and entrepreneurship. As a General Partner at Hummer Winblad, I enjoyed the exposure and access to some of the key innovators and drivers of the new economy; company's like Omniture, Move Networks, Mulesource, Widgetbox, and many others. At 36, however, I felt a persisting and important pull to embark on a new journey of growth, discovery, and learning. In my career to date, I have found that if you follow your heart, work tirelessly, and fish in good waters, good things will happen. For Widgetbox and our colleagues in the space, good things will continue to happen if we stay true to the web's architecture of openness, distribution, and standardization and to users’ passion for empowerment, expression, and need for community."

Will's story is much like that of those of more than twenty venture capital partners I have talked to over the last few weeks.  From my March 10th post:

Local VC departures include Guy Hoffman who left TL Ventures a while back and is now running a startup called USHomeTeam, Ram Velidi who is leaving Sevin Rosen and looking for opportuntities and Ed Olkkola from Austin Ventures who is now running Belo Interactive's business development efforts.  What is going on?  The reason is simple, more and more venture capital firms are moving into private equity ~ big, complex deals that require lots of money and even more analysis.  Guys like Guy, Ed and Ram who are good at working with startups aren't interested in the number crunching private equity requires.  Their 'soft skills' and high EQ (emotional IQ) that produces 10x returns in venture capital, isn't as useful in the private equity realm.

The most interesting aspect of this trend is the fact that so many really smart people are now available to join startups.  Venture capital's 'brain-drain' offers entrepreneurs a treasure trove of former VC partners interested in helping them execute on their ideas.  Bringing on someone like Ram could offer a startup a 'jump start' that could mean the difference between failure and success.

（本文删节版已发表于《创业邦》www.cyzone.cn 杂志2008年3月刊）

作者：桂曙光

VC在投资时，通常会在关注两个方面：一是价值，包括投资时的价格和投资后的回报；二是控制，即投资后如何保障投资人自己的利益和监管公司的运营。因此，VC给企业家的投资协议条款清单（Term Sheet）中的条款也就相应地有两个维度的功能：一个维度是“价值功能”，另一维度是“控制功能”。有些条款主要是“经济功能”，比如投资额、估值、清算优先权、等，有些条款主要是“控制功能”，比如保护性条款、董事会、等。如下图所示：

“董事会”条款无疑是“控制功能”中最重要的条款之一。在创业天堂硅谷流行这么一句话：“Good boards don’t create good companies, but a bad board will kill a company every time.”（好的董事会不一定能成就好公司，但一个糟糕的董事会一定能毁掉公司。）

Term Sheet中典型的“董事会”条款如下：

Board of Directors: The board of the Company will consist of three members, two designated by the Common Shareholders and one of which must be the Company’s CEO; and one designated by the Investor.

董事会：董事会由3个席位组成，普通股股东指派2名董事，其中1名必须是公司的CEO；投资人指派1名董事。

对企业家而言，组建董事会在A轮融资时的重要性甚至超过企业估值部分，因为估值的损失是一时的，而董事会控制权会影响整个企业的生命期。但很多企业家常常没有意识到这一点，而把眼光主要发在企业估值等条款上。设想一下，如果融资完成后，企业的董事会批准了以下某个决议，企业家/创始人是否还会后悔把主要精力放在企业估值的谈判上：

• 开除创始人管理团队，并使其失去了尚未承兑（unvested）的股票；
• 拒绝其他投资人的投资意向，直到公司几乎现金短缺，然后强迫公司以低估值从当前投资人那里募集B轮融资；
• 将公司廉价卖给公司投资人投资过的其他公司。

在A轮融资之前，大部分私营公司的创始人/CEO是老板，但融资之后，新组建的董事会将成为公司的新老板。一个好的董事会，即使是在你不同意他们做出的决策的时候，仍然信赖它。

董事会席位

根据中国《公司法》规定，有限责任公司至少要有3名董事，而股份制公司则需要5名董事，但这并不是世界范围内通行的版本。在开曼群岛（Cayman Islands）、英属维尔京群岛（BVI）以及美国的许多州（如特拉华州），其法律允许公司只设1名董事。通常来说，董事会席位设置为单数，但并没有法律规定不允许为双数。对A轮融资的公司来说，为了董事会的效率以及后续融资董事会的扩容考虑，理想的董事人数为3~5人。

董事会应该反映出公司的所有权关系

董事会代表公司的所有者，负责为公司挑选其管理者－CEO，并确保这位CEO对公司的所有者尽职尽责。当然，糟糕的CEO自然会被淘汰出局。董事会的设立应该反映出公司的所有权关系，比如已经公开发行上市的公司，其董事会构成就是如此。理论上，所有的董事会成员都应服务于公司的利益，而不是仅仅服务于他们自己持有的某种类型的股权。

通常A轮融资完成以后，普通股股东（创始人）还拥有公司的绝大部分所有权，普通股股东就应该占有大部分的董事会席位。假设，A轮融资完成以后，普通股股东持有公司大约60%的股份，如果A轮是两个投资人的话，董事会的构成就应该是：

           3个普通股股东+2个投资人=5个董事会成员

如果只有1个投资人，那么董事会的构成就应该是：

           2个普通股股东+1个投资人=3个董事会成员

不管是以上哪一种情况，普通股东都按简单多数的方式选举出其董事。

在融资谈判中，创始人需要明确和坚持两点：

• 公司董事会组成应该根据公司的所有权来决定；
• 投资人（优先股股东）的利益由Term Sheet中的“保护性条款（Protective Provisions）”来保障。董事会是保障公司全体股东利益，既包括优先股也包括普通股。

设立独立董事席位

融资谈判地位有时会决定谈判的结果。如果创业企业质量很好，在A轮融资时投资人会认可这样的董事会安排。但是如果投资人不答应这种董事会结构，而创业者又希望得到他们投资的话，采用下面这个偏向投资人的方案（设立一个独立董事）：

         2个普通股股东+2个投资人＋1个独立董事=5个董事会成员；或

         1个普通股股东+1个投资人＋1个独立董事=3个董事会成员

偏向投资人方案的董事会给予不同类型股份相同的董事会席位，而不管他们的股份数量（股权比例）。这有点不合道理，但这就是风险投资！

如果最终签署的条款是以上方案的话，那么创业者要让投资人同意：在任何时候公司增加1个新投资人席位的时候（比如B轮投资人），也要相应增加1个普通股席位。这样是为了防止B轮融资时，投资人接管了董事会。

投资人可能会推荐一个有头有脸的大人物做独立董事，创业者通常是无法拒绝的。但是这个大人物跟VC的交往和业务关系通常会比跟你多，当然他更倾向于维护投资人的利益了。

这样，普通股股东（创业者）在董事会上就面临失去主导地位了，解决这个困境的最简单办法是在融资之前就设立独立董事。至少也是选择你信任的、有信誉的人来做独立董事。如果融资之前，你无法或没有设立独立董事，谈判是要争取下面的权利：

• 独立董事的选择要由董事会一致同意；
• 由普通股股东推荐独立董事。

设立CEO席位

投资人通常会要求公司的CEO占据一个董事会的普通股席位，这看起来似乎挺合理，因为创始人股东之一在公司融资时通常担任CEO。但创业者一定要小心这个条款，因为公司一旦更换CEO，那新CEO将会在董事会中占一个普通股席位，假如这个新CEO跟投资人是一条心的话，那么这种“CEO＋投资人”的联盟将控制董事会。

新的CEO也许是一名职业经理人，通常他与VC合作的机会远比与你们公司合作的机会多。VC通常会向有前景的公司推荐CEO，还会让这名CEO共同参与公司的投资。他们决定公司支付给这个CEO的报酬。你认为CEO会忠诚于谁呢?

“CEO＋投资人”联盟可能会给公司、公司创始人和员工都带来伤害，一个硅谷的简单例子可以参考：

公司需要募集B轮融资，在投资人授意下，CEO并不积极尽力运作，导致公司无法从其它地方筹措资金。结果，公司只能从当前的投资人那里以很低的价格获得B轮融资；

结果是：投资人在公司估值较低的时候注入更多资金，获得更多股份；几个月之后，CEO也按照市场行情获得了“合理数额”的股份。但创始人和员工的股份比例却被稀释了。

上面的故事告诉我们，一个新CEO并不一定是你在董事会中的朋友。如果你正打算雇佣一个新的CEO，不妨为他在董事会中设立一个新的席位。

例如，对于偏向于投资人的董事会中，投资人已占有2个席位，专门增设1个CEO席位：

       1个普通股东+1个投资人+1个CEO（目前是创始人XXX）＝3个董事会成员

       1个普通股东+1个投资人+1个独立董事+1个CEO（目前是创始人XXX）＝4个董事会成员

董事会中的普通股席位应该永远由普通股股东选举产生。另外，如果你希望董事会的成员数是奇数的话，那就再多加一个独立席位。

在融资谈判中，创始人需要明确：

• 尽管CEO持有的也是普通股，但新的CEO很可能要同投资人结盟，CEO席位会在事实上对投资人更有利；
• CEO并不在董事会中代表普通股股东，他的工作是让公司所有类型的股权增值。

公平的投资后董事会结构

目前国内VC的A轮投资Term Sheet中，董事会条款的主流是：“创始人＋创始人及CEO＋A轮投资人”的结构。

通常而言，下面的A轮投资后的董事会结构也算公平：

• 1个创始人席位、1个A轮投资人席位及1个由创始人提名董事会一致同意并批准的独立董事。（单一创始人）
• 1个创始人席位（XXX）、1个CEO席位（目前是创始人YYY）、1个A轮投资人席位及1个由CEO提名董事会一致同意并批准的独立董事。（多个创始人）

总结

企业家在私募融资时关注“董事会”条款，并不是说通过董事会能创造伟大的公司，而是防止组建一个糟糕的董事会，使创始人失去对企业运营的控制。一个合理的董事会应该是保持投资人、企业、创始人以及外部独立董事之间合适的制衡，为企业的所有股东创造财富。

What to Include When Building Your Income Statement

by: Caroline H. Worrall

Often when a entrepreneur starts a business, he or she creates an income statement for the plan that is often built on unrealistic expectations and/or missing key elements. Understanding what goes into an income statement will help you create a realistic plan.

An income statement is separated into several parts. The first section is the revenue section, which can be one line or several lines if you want to break out your revenue by product or service. In general, your revenue can grow as quickly as you would like, but you must understand the drivers behind your growth.

For instance, if you have developed a new product for a semiconductor manufacturing process, it may be eighteen months before you see your first revenue because that is how long the semiconductor manufacturing cycle lasts, and your product will not become part of the process until the next cycle.

If you've created a revolutionary anti-aging skin cream, you may be to grow your revenues exponentially, but there will be a significant marketing and sales budget behind that growth that will have to be accounted for in your expenses. And note, those sales and marketing dollars will have to be spent before you see a dime of revenue.

The next section is the cost of goods sold (COGS). Historically, COGS are the costs directly related to the purchase or production of whatever your company sells. I have also seen a clever play on the acronym for service companies: cost of services generated.* If you sell time of your employees, you could list their time and allocated overhead as cost of services generated.

The next section is gross profit. This is your revenue minus your COGS. Your gross margin is the gross profit divided by your revenue times 100. This number can be compared with other companies in your industry to give you a sense of your competitiveness. If your gross margin is wildly out of line with your competitors, you need to figure out and understand why.

The following section shows your operating expenses.  This is usually the section where novice entrepreneurs get into trouble. Included here would be your depreciation, your sales and marketing expenses, and your general and administrative expenses.

Sales and marketing

• Personnel costs (with overhead of 20-30%): Sales, marketing and business development, plus any support personnel
• Commissions
• Collateral and promotional materials
• Travel and entertainment costs
• Trade shows
• Advertising
• Branding

General and Administrative

• Personnel costs (with overhead of 20-30%): Executives, HR, IT, admin
• Insurance costs aside from health care: property, liability, key man, umbrella, etc.
• Rent: include both monthly and annual operating assessment
• Utilities: power, telephone, internet, cell phone, cleaning services, garbage disposal
• Non-sales related travel and entertainment
• Office supplies, postage & shipping
• Legal and accounting costs
• Other misc

Note that overhead can be broken out separately, including such items as payroll taxes, workman’s comp, unemployment insurance, health and dental insurance, other employee benefits, etc.

Subtract the operating expenses from the gross profit to get your net profit or earnings before interest and taxes (EBIT). Divide your EBIT by your revenue to get your net profit margin.

You are unlikely to have extraordinary items when projecting an income statement, but if you do, they would go here, followed by the interest earned/paid section and the taxes section.

After subtracting out your interest and taxes, you would have the company's net profit.

When creating your income statement, think of every cost you might incur. Compare your S&M and G&A sections with those of public companies. Try to determine why your percentages are out of line, if they are. There is no reason why you cannot come up with a better way to do things and gain several margin points doing so, but make sure that you have not gained those point because you forgot to pay your employees health insurance.

* Note: I am discussing this purely on a business planning basis. Do not use any definitions or expanations in this article for tax planning or reporting purposes. See a tax accountant for your tax reporting.

No Adjectives Please!

By David Hornik

I was having breakfast this morning with Salil Deshpande from Bay Partners. Salil and I were talking about assessing company progress and how best to measure that progress. Salil invests in super early-stage deals and has his companies report to him on their progress on a frequent basis. He said that he had one CEO who would report on his progress in such florid language that eventually Salil had to forbid his use of adjectives in his progress reports. Salil said that he didn't want to hear that things were going great. He wanted to hear precisely how things were going.

I nearly jumped out of my seat. Salil had articulated one of my biggest pet peeves when it comes to company pitches (and board meetings for that matter). I hate adjectives. I don't want to hear that one of the company founders is a "fantastic sales exec." I want to hear that she was Presidents Club the last twelve years running. I don't want to hear that the product is "revolutionary and paradigm-shifting." I want to hear about the specific features of the product that are differentiated and how. I don't want to hear that the company has "massive market traction." I want to see a graph of progressive quarterly sales and a giant sales pipeline.

Adjectives are not convincing. Facts are convincing. I may not agree with the conclusions a company draws from those facts. But I will at least be in a position to appropriately assess those conclusions. Whereas adjectives are all about conclusions without the underlying facts. As an entrepreneur, you are far better off having me determine that your market is "massive," your founders are "brilliant," and your product is "elegant," than to tell me that your company has "an elegant solution serving a massive market designed by brilliant founders." So reread your pitch and remove all of the adjectives. It will go massively, monumentally, gargantuanly. colossally better that way.