Does revenue matter?

by StartupCFO

From the title of today's post you might be thinking that I've lost the plot, but this is a legitimate question for any venture-capital backed startup on a quest to deliver big multiples to its shareholders. For "normal" businesses (i.e. those that don't require large periodic infusions of capital) revenue and cash from operations are like blood. Without them, you're dead. So, let's look at the role and importance of revenue for hi-tech startups.

The case for revenue

Revenue generation is an important milestone in the life of a startup. Your product is ready and customers are actually willing to pay for it. In the context of raising money from VCs revenue plays a very important role:

- Validation that people actually want your products

- Paints a picture that there is a path to building a viable and large stand alone business

Unless you're in the Valley and working with some forward-looking VC funds, you cannot raise real money without a credible business model and large potential revenue stream. Here on the east coast this is very important. Especially with the dreaded recession word on everyone's lips.

Exits don't (usually) drive from revenue

Despite the importance of revenue the funny thing is that when a company buys you, it's not usually for your revenue stream. As a result, the price they pay is not a multiple of those revenues. Instead, the rationale for acquisitions and their pricing is based on one or more of the following drivers:

- Building a relevant product or service that people love and use regularly

- Acquiring a large base of users for which you have valuable usage and demographic information

- Key products or technology that can add value when applied to the acquirer's business

There are other drivers, but these are the big ones and they are independent of the level of revenue that you have.

The inflection point

There comes a point in the life of a startup when it must make some big decisions. Do you stay lean, focus on product, acquire a small, loyal user base and sell early? Or, do you double down and raise the capital needed to build a go to market team and a large revenue base?

I call this an inflection point because it has a big impact on all stakeholders. If you're a founder, you will sell a lot of your company. If you're a VC, you'll be making a big bet. And if you're a buyer the price that you pay is going to go up.

Given that companies are not (usually) bought for their revenue streams, the question is whether as a founder and VC you will get an adequate return on the $ invested to build that revenue base. It's unlikely that an acquirer will keep your sales team. In addition, marketing and all back office functions will be run by the acquirer. So, all they really want are your developers, product experts and perhaps a biz dev evangelist. The rest is noise. They won't pay a premium for it. Moreover, today's tough public stock markets won't tolerate an acquisition that doesn't immediately improve the buyer's earnings per share.

So, what's the bottom line (actually the top line, I guess…)? As a startup, you must have a credible business model and a ready market of people and companies willing to pay for your offering. You will have a tough time raising capital without a revenue story. You should get in market as early as possible, both to generate revenues and more importantly, to improve your product. However, you might be well served to make only modest investments in your sales & marketing team until you have really solved the problem that your company addresses and until you see a credible path to building a large self-sustaining company. Until you have both of these elements, stay lean and mean and focused on product and technology.

VC Presentation - The financial slide

by Daniel Cohen

Almost every VC with a blog will, at some point, write an amazing post on how to prepare the best VC presentation. I guess that it makes sense – every venture capitalist would like to see his own wishes implemented in the material he gets from entrepreneurs. (For some examples, check Jens Lapinski, Guy Kawasaki, and David Hornik).

This post is not another VC presentation guide. Well, not a complete presentation guide. I am going to focus not on the full VC presentation, but only on a single (and probably most important) slide – the financial slide.

In the past 7 years, I have seen many presentations. Some are amazing, some are just ok. But one thing is beyond me – even though entrepreneurs are coming to see VCs for money, they don't put enough effort in presenting their financial forecast in a way that makes sense and that is VC compatible. Below, I have listed 6 tips on how to create the financial slide. I also included an example of a financial template that can be used (I think) when making VC presentations (Will be interesting to see how many entrepreneurs will use this in their presentations to Gemini…)

#1: You need a financial slide. I guess this is obvious. I have met many entrepreneurs that come to a VC meeting with no financials. That's like coming to a rock concert without a ticket. In other words: YOU HAVE TO HAVE FINANCIALS.

#2: The Excel file is not enough. One of my favorite quotes is "We didn't prepare a financial slide, but we will be happy to show you our highly complex excel-based model". Usually, the 1-page summary slide is more than enough.

Just a few days ago I had a meeting with an experienced entrepreneur that I appreciate and trust. He was proud of his highly sophisticated financial slide (Copied/paste directly from Excel). He said that a sophisticated financial slide gives all the answers required AND shows strong understanding of the business. I actually agree with those points, but I think that the sophistication should come AFTER a simple summary. Bottom line: THE EXCEL STAYS HOME.

#3: Will you make 68 cents in year 4 of the business? Since financials slides are outputs of sophisticated models, the outputs are always a bit funny. Almost every plans that I see shows that in a few years the company will generate (For examples…) $55,283,189.45. I think that numbers should always be rounded, especially when the budget goes beyond year 2 & 3. In the example above, $55M forecast is more than enough. In other words: ROUND NUMBERS.

#4: No graphs. This one is probably subjective. I think most VCs don't really care for the graphic presentations and are happy to read through a simple financial summary. I always ask the entrepreneur to skip through the graphs directly to the actual table summary. In the same words: NO GRAPHS.

#5: Take the top-down approach (as well as bottom up). Similar to the previous point, many entrepreneurs don't bother to check if the business model they created actually makes sense. This is beyond the rounding errors. Is it really possible in your vertical to triple the revenuers every year? Taking a quick glance at the final summary helps in making big changes that should have been created in the internal process.  In other words: DOES THIS MAKE SENSE?

Serial Entrepreneurs and High Valuations

by Tim Marman

I wrote in the past that sometimes you can take too much money - doing so creates certain expectations for an exit that might not be achievable and limits your flexibility. In the context of the discussion last week, I think it's important to highlight that these economics are not always the fault of the venture capitalist. For example, Jason Calacanis said you should take as much money as you can get and Marc Andresseen said "in general, [you should raise] as much as you can".

Billions or Bust

Another one of my favorite recent examples is Slide, founded by Max Levchin of PayPal fame. Slide recently raised $50M from T-Rowe Price and Fidelity - giving up 9% for a pre-money valuation of roughly $500M. Granted, T-Rowe Price and Fidelity probably aren't quite expecting the same kind of returns over the same time frame as a VC, but it still sets a ridiculous high floor for an exit.

That is, in part, the plan. As Sarah Lacy put it, "Levchin, who co-founded and later sold PayPal, wanted to prove he could do it again - this time, generating more than the $1.5 billion PayPal fetched from eBay in 2002." Lacy defends that valuation not because of what the company is worth today, but that it's a "swing-for-the-fences play" which requires a lot of money - and if their plan works then it will be worth far more.

But, as one commenter on the BITS article points out, "the idea that Slide and RockYou 'add the bulk of perceived value to the consumers of these Web platforms' is misguided and should be a warning sign to Slide’s investors. Facebook only opened up to 3rd-party applications in May [2007], and it was doing just fine before that."  (Still many others would say that some of the applications that Slide and competitors put out detract from the value of Facebook, but that's a separate argument).

Regardless of what you think of Slide, they've basically taken a lot of otherwise attractive exits off the table. They truly have forced a "$1.5B or bust" strategy - the possible end game here is either an acquisition by a very select group of players or an IPO.

The downfall of taking too much

In discussing how much an entrepreneur should raise, Mark Davis lays out four important goals: avoiding bankruptcy, achieving milestones, minimizing time spent on fundraising, and minimizing dilution. On a separate post, he also highlights a few other reasons why you might not want such a high valuation. In short, Marc says that you limit access to sophisticated money in both the short- and long-term.

This got me thinking, so I'm just going to throw it out there: When you think of smart, sophisticated money in the Internet space, do you think T-Rowe Price and Fidelity? And - let me preface this by saying I don't have any details or context here - but isn't it at least a little interesting that The Founders Fund and Mayfield - funds you would consider sophisticated in this space - didn't participate in this round?

Why do they do it?

All three of the guys I've discussed here who have raised "too much money" or are talking about getting as much as you can have all been successful entrepreneurs... but for the most part didn't need this kind of money to do what they did in the past.

There are a few thoughts that come to mind.

At some level, because they can. You might make the argument maybe the serial entrepreneur has transcended the need for sophisticated money. If they no longer need the guidance from the VC, T-Rowe's money may come cheaper and more plentiful. Or, if you want to look at it more cynically, the entrepreneur can take advantage of less sophisticated investors who maybe don't quite understand the space but do understand their previous successes.

Raising the stakes. Some have suggested to me that it's just that these guys have the luxury of betting big now; that by raising this kind of money, they are just upping the ante. The thing is, unless you intend on buying a lot of other companies, it's not clear how some of this money helps beyond a certain point. And, as I mentioned, these guys bet big in the past with more modest purses and won.

After having done it once, these guys may be better able to deploy the money quickly. Hiring will be easier for them since they have a track record and past employees. They know where wish they could have put more money last time and will in theory be able to scale up more easily. (Of course, as we know, the mythical man-month applies here - throwing more resources at developer talent doesn't necessarily translate into better output.)

Ego. Neither of the three guys I mentioned need the money. These companies aren't about getting rich, they're about creating a legacy – and legacies are not built around reasonable successes.

I think these things all factor in at some level, along with many other issues. Maybe Jason is just stockpiling for a coming recession, but I would have to think his investors are not intending on having that money sit around for a rainy day. He had to have had a plan to spend that kind of money and show how it can grow the company accordingly.

And in case it wasn't obvious: for the record, I'm certainly not calling any of these guys out. They have all had greater successes than I have, and I have immense respect for them - I just find this pattern very interesting.

The Rocket Ship investment model

by Babak Nivi

I'm reading Randy Komisar's book, The Monk and the Riddle.

He wrote it before he became a partner at Kleiner Perkins and I like his description of the Rocket Ship model of investing (emphasis added):

"Over the last several years… a new investment model has taken hold. Fill each startup with rocket fuel as fast as possible and blast it into space. The ones that fly, fly, and if the rest of them blow up, c'est la vie.

"In fact, the Rocket Ship Model of startup investment has recently produced many of the most prominent Valley successes. But for every one of them, there are many potentially viable companies that might have eventually prospered if they had been incubated longer.

When too much money is pumped too fast into a startup, there's no room for mistakes. The initial product and the initial fix on the market have to be right. There's no way these companies can stop and reconsider what they're doing with out a great deal of pain.

"You have to be able to survive mistakes in order to learn, and you have to learn in order to create sustainable success. Once the market is understood and the product is fully developed, then move fast and hard."

Some more snippets from the book:

"[Angels] pay for the privilege of helping the company."

"If I invest, I am prone to think like an investor, favoring my return over what's best for the team and often its long-term business."

"In a privately held startup I don't favor the investors over the founders. This is probably the crucial way my thinking differs from a VC's."

"Business is one of the last remaining social institutions to help us manage and cope with change."

"The rules of business are like the laws of physics, neither inherently good nor evil, to be applied as you may. You decide whether your business is constructive or destructive."

Angels: Don't Use Convertible Debt to Fund Startup Ventures

by: Bill Payne

Convertible debentures are debt instruments that convert into equity at triggering events. Angels and other early stage investors use convertible debt as a funding bridge until a subsequent, larger round of investment is closed, usually by venture capitalists (VCs). This bridge loan is converted to an equity investment under the same terms and conditions as the subsequent VC investment and at the same valuation, less a discount to compensate the angel bridge investors for added risk. The discount can vary from 5% to 30%, usually depending on the length of time between the closing of the angel bridge round and the closing of the subsequent VC round.

Convertible debt is inexpensive (minimal legal fees) and leaves the dreaded valuation negotiations to the VCs. When the target company has important assets (patents, capital assets, etc.), investing in an unsecured debt instrument could provide the investors with some downside protection, since distributions at a possible bankruptcy of the company would go first to debt holders before any distributions to shareholders.

The Internet bubble crushed many giddy angels and VCs who invested in seed, startup and early stage companies at outrageous valuations. Afterwards, many angels turned to using convertible debentures for seed/startup investments, as protection from down rounds, even when subsequent investors were not on the horizon. Unfortunately, using convertible debt in these circumstances can substantially reduce by 2-3X the ROI of angel investments, reducing a possible 20X return to 10X or even 7X.

Entrepreneurs and their advisors are eager to offer convertible debt to seed/startup investors. Postponing the valuation negotiation until a subsequent VC round preserves precious equity for the entrepreneurs. Furthermore, debt instruments are generally much less expensive to generate than are documents necessary to close equity rounds of investment, especially those requiring the establishment of a new preferred class of securities for the company. Noting that some attorneys offer reduced or deferred fees to entrepreneurs during startup, one could imagine attorney advisors also suggesting convertible debt for the first angel round.

But, convertible debt is seldom a good seed or startup investment for angels. How does convertible debt reduce the ROI of angel investments?

Entrepreneurs who need to raise multiple rounds of investment are asked by investors to raise enough money in each round to accomplish significant milestones, such as licensing of a critical piece of technology, completing a prototype, entering into an important partnership, entering beta testing, completion of FDA I testing, achieving first revenues, etc. Accomplishing these milestones reduces risk and increases the valuation of the enterprise.

Let’s look at the valuation of a hypothetical company in the graphic below. The three stages of this company (A, B, & C) might be defined as follows:

A – a pre-revenue company with a prototype but without substantial orders

B – the same company after successful beta testing by the first customers

C – the same company after closing on additional partnerships that are substantially ramping sales

This is a plot of the valuation of a hypothetical new venture over time, say 2-3 years. Clearly the increase in valuation of the company is not linear, because of the achievement of specific milestones substantially reduces the technology and execution risk of the company. Demonstration that substantial revenues can be generated between points B and C would be expected to be accompanied by a large step up in the value of the company.

Angel investors typically invest at the seed/start up phase of enterprise development, on the timeline between points A and B. The company is typically pre-revenue but has accomplished some milestones and identified customers interested in testing the product.

Case I: Let’s assume a VC discovers that an entrepreneur has an interesting product and is operating in a business vertical close to the sweet spot of the VC’s portfolio companies. The VC is in due diligence but the entrepreneur is running out of cash. The entrepreneur approaches angel investors for funding and explains the VCs interest to the angels but makes it clear that the VCs investment is still several months into the future (but before Point B in the chart). In this case, it might make sense for the angels to accept convertible debt in exchange for their investment, knowing that it is likely, but not assured, that the VCs will negotiate a valuation and invest within a few months. Since the angels are assuming more risk than the VCs, all parties agree that a 20% discount off the valuation of the VC round would be fair for the angels who invest earlier. (The angels also assume the risk that the VCs will decide later not to invest.)

Case II: Let’s assume the entrepreneur and angels anticipate the need for raising more capital at some point in the future, but expect the entrepreneur to achieve substantial milestones with the cash invested by the angels. We might expect those achievements to move the company to or beyond point C on the chart above. If so, the angels should expect a 2X or more step up in valuation at the time the VCs invest. In this case, it is in the best interest of the angels to invest in a preferred security, rather than convertible debt. Establishing the preferred class of stock for the angels prior to the involvement of the VCs smoothes the road for the subsequent investment by the VCs. If the angels invest in a convertible debt instrument in Case II, the entrepreneur and angels cannot possibly establish a fair discount against the valuation of the subsequent round. [The author acknowledges that this simple model suggests that VCs might invest at valuations as low as $2 million, which is highly unlikely. Nonetheless, this example remains valid in explaining the thesis that convertible debt is a poor investment for angels.)

Let’s establish some guidelines:

1. If and only if a subsequent investor (usually a VC) has a signed term sheet with the entrepreneur and has started due diligence, it may be appropriate for angels to invest using convertible debt (a bridge loan to the closing of a much larger round of funding by professional investors). In this case, the angels deserve a discount off the negotiated valuation between the entrepreneur and the VCs, probably 10% to 30%, depending on the time required to close the round.

2. If no subsequent rounds of investment are anticipated, angels may choose to invest in convertible debt but only with the conversion defined by a valuation acceptable to the angels at the time of the investment. In this case, angels may be reducing their risk somewhat in case of a negative exit. Debt holders will likely have the rights to take over assets (patents, etc.) in the case of a bankruptcy, ahead of shareholders.

3. If subsequent rounds of investment are anticipated, but no such investor has been identified, it is impossible to assess the time required to close a subsequent round. Even a poorly funded company, in such cases, can accomplish significant milestones that will raise the valuation of the company substantially. In this case, angels should never invest in convertible debt (unless the valuation at conversion is specified), even with a variable discount of the next round (say, 2% per month between the closing of the angel round and the subsequent round). Variable (or onerous) discounts usually result in the subsequent investor negotiating away a substantial piece of the discount. In this case, preferred shares are the most appropriate security for the investment.

One final comment against using convertible debt for angel rounds: Convertible debt creates misalignment between entrepreneurs and their angel bridge investors. Angels would prefer to see VCs invest at a lower valuation as the angels convert their bridge debt to equity (increasing the angels’ ownership fraction) while entrepreneurs seek VC investment at a higher valuation (maintaining more ownership for the entrepreneurs). Under these circumstances, angels may be less motivated to undertake activities that could increase valuation prior to the subsequent funding. Misalignment of entrepreneurs and investors is simply a bad practice.

Summary

For Entrepreneurs: Pursue smart money, that is, investors who can help you build a great enterprise. Smart money will likely want to invest in preferred shares in your company.

For Angels: Don’t fall in love with entrepreneurs, their products or their technology. Look at the deal terms early. Walk away from non-negotiable deals in which convertible debt with no specified valuation set at the time of your investment, especially when no subsequent investor is on the scene.

For Attorneys Advising Startup Entrepreneurs: Understand that smart angels are going to walk away from most convertible debt deals. Help your clients structure deals that are best for both sides and will tee up the company for subsequent rounds of investment.

（本文删减版已在《经理人》杂志“公司金融”专刊2008年6月15日 发表，作者：桂曙光）

VC在决定是否投资一个公司时，通常最看重的是管理团队。一方面是管理团队的背景和经验，另一方面是保持团队的稳定和持续性。对于背景和经验，可以通过前期的尽职调查（Due Diligence）得到核实，而兑现条款（Vesting）则是保证团队的稳定性的一个有效手段。

兑现的概念其实并不复杂，一般来说，投资人都希望创始人和管理团队的股份及期权都要4年时间才完全兑现，就是说你必须呆满4年才能拿到你所有的股份或期权。如果你提前离开公司，根据约定的兑现公式，你只能拿到部分股份或期权。

兑现条款对国内很多尚未融资的民营企业家来说，不是很容易理解。主要原因是他们的企业都是有限责任公司，按照国内公司法，他们都不存在兑现问题，因为压根就没有股票和期权，创始人一开始就拥有了按照出资额对应的公司股权比例。但外资VC在以离岸公司的模式投资时，离岸公司在股份发行和期权授予方面的灵活性，就满足了VC对创始人和管理团队的控制。

什么是兑现条款

投资协议中典型的兑现条款如下：

Vesting: All stock and stock equivalents issued after the Closing to employees, directors, consultants and other service providers will be subject to vesting provisions below unless different vesting is approved by the majority consent of the Board of Directors: 25% to vest at the end of the first year following such issuance, with the remaining 75% to vest monthly over the next three years. The repurchase option shall provide that upon termination of the employment of the shareholder, with or without cause, the Company retains the option to repurchase at the lower of cost or the current fair market value any unvested shares held by such shareholder.

The outstanding Common Stock currently held by XXX and YYY will be subject to similar vesting terms provided that the Founders shall be credited with [one year] of vesting as of the Closing, with their remaining unvested shares to vest monthly over three years.

股份兑现：在交割之后发行给员工、董事、顾问等的所有股份及股份等价物将遵从以下兑现条款：发行后的第一年末兑现25％，剩余的75％在其后3年按月等比例兑现。公司有权在股东离职（无论个人原因或公司原因）时回购其尚未兑现的股份，回购价格是成本价和当前市价的低者。由创始人小学校 XXX 和 YYY 持有的已发行流通的普通股也要遵从类似的兑条款：创始人在交割时可以兑现其股份的25%，其余股份在其后3年内按月兑现。

对于早期公司，VC通常是要求4年的兑现期，其中第1年为“阶梯（Cliff）”兑现，其余3年每月兑现，到第4年末，全部兑现。如下图：

上图的意思就是：如果你在1年之内离开公司，你兑现不了任何股份。1年之后，你可以兑现25%的股份（这就是“阶梯”），然后你开始按月在剩余的年限里（3年）兑现剩余股份。比如你在投资交割1年半之后离开公司，你可以兑现的你所有股份的37.5%（25%+75%*6/36）。

股份持有人在离开公司后，他那些还没有兑现的股份通常由公司收回注销，这些股份不会重新分配，所有其他留守的股东都被反向稀释而增加股权比例，比如VC、普通股东、期权持有人。对于没有兑现的期权，公司收回至期权池，可以继续分配给后续员工。

很多创业者不理解：为什么原来属于我的股份，VC一旦投资进来，这些股份就需要几年时间才能拿回来，这些股份本来就是我的啊！

对于兑现条款，创业者要了解以下几点：

1、 你的股份一开始就都是你的，在行使股东投票表决的时候，你可以按照所有股份都已兑现的数量投票。比如投资交割时创始人的股权比例是70%（1000万股），则在你离开公司之前的任何时候，都有1000万股股票的投票权；

2、 你在公司工作满4年之前，可以自由处置（如：出售）的股份数量不是全部，而是按照上述兑现条款约定已经兑现的数量。比如上述的1000万股，创始人在投资交割后1年半的时候，可以自由处置的数量是375万股；

3、 兑现条款在VC投资之后，可以通过董事会修改，以应对不同的情况；

4、 拒绝兑现条款是会让投资人非常担心你会离开公司，而这对于他们决定是否投资非常重要；

5、 兑现条款对VC有好处，对创始人也有好处。如果公司有多个创始人，VC投资后某个创始人要求离开，如果没有股份兑现条款，离开的创始人将拿走他自己全部股份，而VC和留下来的创始人将要为他打工。如果有股份兑现条款，所有创始人都会努力工作以拿到属于自己的股份。同样道理，员工的股权激励也需要通过兑现条款的方式逐步获得。

谈判要点

创始人要明白一个事实，随着时间推移，你对公司的贡献会相对越来越不重要，但是你每月兑现的股份数量却相对比较大。创始人通常在公司早期对公司的贡献最大，但是股份兑现在3、4年内都是平均的。一旦你对公司的贡献相对减小，公司的任何人都有让你离开的动机，同时取消你尚未兑现股份。所以，一旦VC发觉你在公司存在的价值与你尚未兑现的股份不匹配的时候，你就麻烦了。比如，VC在第2年发现你对于公司而言，没有太多价值了，而你还有超过50%的股份尚未兑现，那VC最理性的做法就是：开除你，回购你的股份。所以，创始人要有所准备。

第一、通常，公司回购未兑现的股份会被注消，这样的反向稀释会让创始人、员工和VC按比例受益。创始人可以要求公司不注销回购的股份，而将这些股份在创始人和员工之间按持股比例分配。这样要求的原因是离开公司的创始人所持有的尚未兑现股份是VC投资之前创造的，应该分配给创造这些价值的创始人和员工，而不是VC。当然，也可以将回购的股份放入期权池作为取代者的期权。

第二、争取最短的兑现期。考虑到创始人已经在公司工作了1年或更长时间，这些工作时间可以要求投资人给予适当的补偿。比如创始人可以要求在投资交割时，就获得其1年的兑现股份（25%），在未来3年兑现剩余股份。如下图：

第三，创始人要争取在特定事件下有加速兑现的权利。比如，达到某个经营里程碑指标时，获得额外的股份兑现；被董事会解职时，获得额外的股份兑现。额外兑现的股份数量通常是原定1年的兑现量，有时甚至是全部尚未兑现的股份。比如在经过2年，由于达到业绩目标，按事先的约定，你有权获得1年额外的股份兑现，则股份兑现如下图：

第四，如果公司在被投资之后，股份兑现期还没有结束就IPO了，那创始人自然拿到全部股份，这样也是VC所期望的。但是在目前的市场环境下，典型的早期公司需要5到7年才可能IPO退出，大部分的退出方式是被并购。通常来说，创始人在面临公司被并购时，会要求加速兑现股份。处理方式有两种：一是“单激发（Single trigger）”，即在并购发生时自动加速兑现；二是“双激发（Double trigger）”，即加速兑现需要满足2个条件（比如，公司被并购及创始人在新公司不在任职）。

目前比较常见的加速兑现是“单激发”额外兑现25% - 50%的股份，“双激发”额外兑现50% - 100%的股份。加速兑现不缩短兑现期，而只增加兑现股份数量，减少未兑现股份数量。相对而言，“双激发”应用得更普遍一些，而“双激发”中的另外一个激发因素（如创始人在新公司不在任职）也是可以谈判定义的。比如被无理由开除，或者创始人因合适理由离职。恰当的开除理由包括故意过失、重大过失、欺诈行为、违反和约、等；合适的离职理由包括职位变更、薪酬降低、住址变远、等。

具体的条款如下：

In the event of a merger, consolidation, sale of assets or other change of control of the Company and should an Employee be terminated without cause within one year after such event, such person shall be entitled to [one year] of additional vesting. Other than the foregoing, there shall be no accelerated vesting in any event.

在发生被兼并、合并、资产出售或其他改变公司控制权事件，并且员工在此事件后1年内被无故解雇，被解雇员工将有权获得1年额外的股份兑现。除此之外，任何情况下没有加速兑现。

创始人当然希望在并购交易时加速拿到全部股份，因为对方可能是长期得竞争对手，在新公司再工作几年来兑现所有股份可不是件愉快的事情。而VC则不希望加速兑现影响交易的进行，因为并购方通常也希望对创始人、团队、员工保持某些持续的激励，因此他们有时候不愿意让所有股份兑现，或者他们重新设置新的股份兑现计划作为交易的一部分。

股份兑现的应用实例

公司发行5,000,000股，创始人甲、乙两人各持有2,000,000股，VC持有1,000,000股，股权比例分别为40%，40%，20%。其中，两位创始人股份的20%（即400,000股）在公司设立时就兑现，公司以后不能回购。剩下80%（即1,600,000股），分四年按月兑现（每年20%，400,000股）。

在VC投资后的第一年期间，尽管甲、乙两位创始人已兑现的股份只有400,000股，但仍然拥有全部股份（公司的40%比例、2,000,000股）的投票权。

如果甲在一年后离开的话，他会拿到1年兑现的20%，即400,000股，加上创始时拿到的400,000股，共800,000。甲剩下未兑现的1,200,000被公司以象征性价格回购注销。公司总股份量变为3,800,000。甲占有800,000/3,800,000 = 21%；乙占有2,000,000/3,800,000 = 53%。VC占有1,000,000/3,800,000 = 26%。

如果没有兑现条款约束的话，甲离开时会与乙及VC有很大的争执。甲会要求拿到自己全部的2,000,000股，而乙和VC当然会反对，他们当然不愿意为甲打工。

如果一年以后，乙的贡献或重要性比甲多，而最初甲、乙的股份分配是相同的。公司可以召开董事会，VC、甲、乙一起商量，把甲、乙双方还没有兑现的股份重新分配。甲、乙都会比较容易接受，因为已经兑现的股份不变。而且如果一方不接受的话，离开公司，也有一个明确公平的已经兑现的股份。

总结

尽管股份兑现条款常常是创始人和VC谈判的热门话题，但这个条款其实对于双方都是有某种程度的好处。它是一个很公平的方法，因为创业是一个艰苦的长期过程，没有一个团队是永远的，创始人应当将兑现条款看作是一个整体协调工具：对VC、共同创始人、早期员工以及后续员工。（作者：桂曙光）

（参考：www.feld.com/blog, www.shaoblog.com）

How to pitch investors (VCs and Angels)

by Alexander Muse

A Few Thoughts, Pre‐Pitch…

Where possible, research the investor or firm you are meeting with. Tailor the presentation to their affinities. Why might there be good synergies? What past investmentshave the made they complement your work? Do they blog? Are there specific things they are looking for in potential investments or entrepreneurs? Call someone at one of his or her portfolio companies (it will trickle back to them and make you look good).

• Let the CEO lead all talks but have someone highly technical there for reinforcements and specific tech‐y questions.
• If at all possible, wait until you have a demonstrable product (i.e. a working alpha) before starting the pitch process. Many VC's now will just want a team background and to then see the product. They may not even ask for the deck.
• Make sure you pack any projector converters you will need. Ask an assistant ahead of time to confirm whether you will have wireless access, only if you need it.

Four Steps to a Great Pitch:

1. Tell them what you are going to tell them: Show them where you are going to take them, on the title slide.
2. Tell them how you are going to tell them: Have an agenda slide and stick to it.
3. Tell them: make sure the body of your presentation always reinforces your opening point.
4. Tell them what you told them: wrap up, recap and go for the close

Obvious, but make sure you can justify/defend your underlying assumptions in the financials. Need an example of how to create financial projections? Guy Kawaski links to an excellent example. You can even download the template! Guy Kawasaki on the 10‐20‐30 Rule

Possible Format for Power Point (Using Key Note may be better):

1. Cover Slide: Logo, name of presenter, date. Spice it up with a quote from a well known authority justifying the need for someone like you, or you specifically
2. Intro Slide: List key team members. Have you raised some money already? Verbally describe the story of how you all came to be; the company story. Prove you come from the community you aim to serve. Two attributes most VCs look for in a founding team ‐ deep tech skills and capable sales skills, so stress these.
3. DEMO: Show the investor something visual (prototype/wireframes) so they can see what the hell it is your working on
4. What Do You Want? Amount Seeking, etc. Be realistic and know EXACTLY what you are going to do with the funds once they hit the bank account
5. Team: Give each team member a slide with small picture. Skip these slides during the pitch if it seems like overkill
6. Problem/Opportunity: What problem are you solving? Why is it important? A personal anecdote is always good. How big is the market opportunity you are pursuing and how fast is it growing? Do you have a credible claim on being one of the top two or three players in the market?
7. What is the Revenue Model? How do you make money? What is your revenue model? What is required to become profitable?
8. Solution: How does your product or service fix the issue(s) from above?
9. Technology:
10. Marketing:
11. Sales:
12. Competition:
13. Milestones:
14. Contact Page:

After you have your PowerPoint, draft up a one‐page executive summary. This is all you will need. Check out Venture Hacks for Advice on what to send to an investor. Don't bother asking them to sign an NDA. You also may want to create a high concept pitch.

To Help Drive Content & Refine the Message

What Union Square Ventures looks for:

1. A technology enabled service business
2. Potential to change the structure of markets
3. Information technology leverage
4. Data asset (Defensibility)– At Union Square Ventures, we look for companies that have a data asset. We think that the most valuable data assets are created when users interact with services on the web.
5. A Strong Management Team

What Union Square DOES NOT invest in

What Charles River Ventures Looks for:

1. The team, its authenticity and empathy for the user experience. Do the founders speak the language of their customers? Do they empathize with their customers' pain? Do they feel passion for their users?
2. Unfair advantage. This is the elusive secret sauce that sets you apart from all of your competition. What about your business and your approach can’t be done by anybody else? Unfair advantage can manifest itself as proprietary and differentiated technology, a superior business model, an incredible team iterating on past success solving similar customer pain, or a network of relationships that drives down customer acquisition costs.
3. Attractive market. Let's imagine that I'm the most cynical financier possible and the one and only thing that matters to me is delivering economic returns to my investors. I'd be looking for businesses that served the entire world population and whose customers were completely price insensitive.

What First Round Capital Looks For

Be prepared for questions. Review Guy Kawaski's, 9 Questions to Ask a Startup:

1. How many outstanding shares of stock are there?
2. What is the monthly burn rate?
3. How much cash is in the bank?
4. When will the company achieve positive cash flow?

Thanks to Sam Huleatt from LeveragingIdeas.com for permission to reprint his 'Pitch Monster', good stuff!

Going Straight To Term Sheet

by Mark Davis

If the VC gets interested early, you may be able to convert this 'market testing' exercise into an investment. 

In rare cases VCs will ask you in to meet their partners, conduct an accelerated due diligence process and offer you a term sheet.  If this happens you can be sure that the investor is pretty excited about your company. 

In this scenario it's likely that you will have other VCs interested in your company in the future.  However, in my opinion the wise entrepeneurs will try to do the right deal with this VC.  There are a few reasons for this. 

• First, if you get the right deal done early you can focus on builidng your company, avoiding the painful and distracting process of raising capital.
• Second, a lot can go wrong with your company over time that could prevent you from being funded in the future.  Microsoft or Google might launch a similar product, your partner might quite or you might not land that partnership that you were so close to getting when the VC laid down the term sheet. 
• Third, the venture market or broader economy might take a turn for the worse, changing funding dynamics and making it hard to raise capital in the future. 
• Fourth, if the investor is this excited about your company they share your vision and are more likely to be highly motivated to help you in the ways that they should.

Learn how to woo the investors

Preparing a business so that it will appeal to financial backers is a tough process. Training courses can help

by Andrew Stone

WHEN Lee Henshaw attended a four-day investment-readiness course to help develop his idea for a new venture, he didn't expect to learn much. With a couple of start-ups behind him and some experience of raising money, he was confident about his business plan.

Henshaw's self-belief was soon dashed, however. A panel of experts examined his investment proposition, along with those of other candidates, and exposed lazy assumptions, knowledge gaps and unrealistic projections.

"It was a shock from day one and made me realise how little I knew," he said.

"I turned up full of confidence and arrogance but they soon beat that out of me. The business plans I had put together in the past were written on the back of a fag packet. It was clear I would not get away with that this time."

The programme took candidates through financial reporting, legal and intellectual property rights and how shareholder agreements are structured. A role-playing sales exercise also forced Henshaw to reevaluate some of his own abilities.

"I have done plenty of sales in my time and I thought I was good at it. When we had the feed-back session they told me they had never heard someone talk as much as I did. I was shocked at first, but it has taught me to be a much better listener."

Close questioning by active venture capitalists made Henshaw realise that he needed to reshape his plan radically if he wanted to attract investors. His business idea stemmed from his frustration at not being able to find a good cuttings service for his PR business (part of any agency's job is to show clients press cuttings of what has been written about them).

His plan was to use internet tracking technology to streamline this laborious process and provide more useful and timely information for other PR agencies. He had originally planned to serve only the sector he knew, the entertainment industry, but the investment-readiness team made him realise he had to apply his product to all PR sectors to create a scaleable business to interest investors.

Doing the "elevator pitch", a one-minute presentation aimed at convincing investors to back the idea, was yet another ordeal. "I am used to presenting to groups of people and I thought I had done a good job but they thought it was rubbish. They made us do it again and again. It's a tough process but it's remarkable when the penny drops and you start to understand what investors are looking for."

The entrepreneurial boot camp Henshaw attended was run by Gateway 2 Investment (G2I), a programme led by private-sector firms but partly funded with public money through the London Development Agency.

It offers the kind of shock treatment that most budding entrepreneurs never get, but which most need before they start talking to potential investors, according to Ian Shields, G2I's programme manager.

"Most entrepreneurs tend to be so absorbed in setting up and running the business that they become blinkered. An invest-ment-readiness programme should get them to look beyond the business and look at it though the eyes of the investor." Entrepreneurs seeking venture-capital backing too often make the same kinds of mistakes, talking endlessly about their product or service and failing to think of, or shape, their business as an investment proposition, said Shields.

"The investor is interested in four questions – How much money do you want? What do you need it for? How much am I going to get back? And when will I get it back? Answer these first and then you can start telling them about your product."

Jonathan Gold, director of NStar, an investor-readiness programme in northeast England, agrees that too many entrepreneurs suffer due to their lack of knowledge and preparation when they meet investors.

"When people try to raise equity finance they often don't know what's about to hit them. Preparing for it takes time. A one-day investment-readiness seminar just won't prepare you for the kind of pressure you will be put under."

The problem is that many so-called investment-readiness programmes are nothing of the kind, according to Colin Mason of the Hunter Centre for Entre-preneurship. "Some are just a glorified checklist or flimsy computer programs," he said.

"Provision is also patchy around Britain. Some good courses disappeared with the recent changes of responsibilities from Business Link to the regional development agencies. What's missing is sustainable funding for the better courses."

Unsurprisingly, finding a well-regarded course to attend and then qualifying for it isn't always easy. Courses led by people with track records as entrepreneurs who have raised money for their own firms and with active investors are likely to be the most worthwhile but also the hardest for budding entrepreneurs to get on to, said Gold.

Only entrepreneurs who can demonstrate they know the basics and whose plans show high growth potential will get access to the best courses, said Gold. "We see a lot of proposals and they often don't show a proper grasp of the financial workings of their own business, let alone demonstrating how they will be able to generate the right returns in the right time scale for investors."

Henshaw agrees that the best courses are those run by experienced entrepreneurs and investors, and warns of the dangers of giving your money too willingly to commercial consultants offering their own investment-readiness advice.

"Entrepreneurs are vulnerable people and there are plenty of businesses out there happy to exploit that. You could spend £10,000 with no guarantees in the commercial sector, whereas the G2I programme cost me £35.

"We were working with incredibly bright people, with amazing track records as business people and investors. They were generous people who did not need to be there."

Since attending the G2I course, Henshaw has already raised £500,000 for his business, Five Leaves Left, and for two of his other businesses, thanks partly to the lessons he learnt on the programme as well as from watching other entrepreneurs develop their own ideas alongside his own.

"I was fascinated by the other people I met. You realise some people have really bad ideas, and some are really brilliant, and you can see where yours falls. When I arrived, I was near the bottom of the pile. Next year I will be at the top."

Leading Chinese video sharing web sites are having trouble staying online

Youku.com, Tudou.com and 56.com may be the most popular video-sharing sites in China, but within the last few months, they’ve all suffered from downtime — due to what each of these venture-backed companies have said are technical problems.

There’s another angle, though. Online videos are a great medium for sharing things like porn or political dissent, two things the Chinese government sometimes censors.

The Chinese government appears to have shut down 56.com, starting yesterday. More from Ogilvy blogger Kaiser Kuo, who has been following the video-shutdown story for some time:

The shut down — the second to impact a top-tier video sharing site — was in discussion for a few weeks, the insider said, and the timing of the outage “probably has nothing to do with” the anniversary of the suppression of the student uprising of 19 years ago.

The official reason for the site going offline: Server malfunctions. The company, which also makes slideshows widgets similar to those of Slide or RockYou, has received $20 million in funding from Japanese firm Hikari Private Equity and Susquehanna International Group China.

[Update: Sequoia Capital and Disney's Steamboat Ventures have also invested in 56.com and Intel Capital may have as well. My source about those investors mentions the irony that Disney would invest in the company which, like its competitors, hosts large amounts of pirated content. Duncan Riley also emphasizes the piracy issue, in comments, below.]

This past winter, the Chinese government introduced new regulations that require any new video site to have a license showing that it is majority-owned by a government-controlled business. A grandfather clause in the regulations, as China Web 2.0 Review reported, appeared to have made these three sites exempt from that rule. It is my understanding, from talking to these companies, that not one has actually obtained any sort of operating license, in any case.

Notably, one of the others, Tudou.com, was apparently shut down for one day in March. The company has raised a total of $85 million from firms like IDG, Granite Global Ventures and General Catalyst and other foreign investors. It competes neck-and-neck with Youku.com. Both claim to have more than 100 million video views per day; while traffic measures in China are not always trustworthy, both are generally considered larger than 56.com. Like 56.com, Tudou said it went offline because it was moving servers — but other reports suggested censorship. From a post at the time by Kuo:

I’ll leave everyone to draw their own conclusions about what actually happened. There’s a story on Sohu.com about [the shut down] here, which makes reference to (unnamed, unsourced) reports about a document supposedly handed down from SARFT central to its Shanghai bureau, called “Shutdown Order Sanctioning Tudou’s Conduct in Violation of Regulations on Internet Audio-Video Services ” — my loose translation — which according to the Sohu story, order an indefinite shutdown pending rectification and reform for ineffective controls of pornographic content.”

Of course, there are real technical challenges to running any large video site. Even YouTube, the largest video site in the world, has at times gone offline.

Youku, the third video site, was also offline for a short time earlier today. Between the three, it appears to be the most clear-cut case of actual server problems, as Kuo also reports.

The company, like its peers, has raised a significant amount of money from foreign firms. Farallon Capital, the hedge fund, led an initial round of $3 million in March 2006. Bain Capital venture subsidiary Brookside Capital Partners led the company’s latest round, for $25 million last fall, with other investors including Sutter Hill Ventures and Chinese firm Chengwei Ventures.

For the conspiracy-sensitive, though, the timing of Youku going offline today — while 56.com is still offline and on the anniversary of Tianenmen Square — seems a bit much to be a coincidence.

There are two moving pieces here. On the one hand, the Chinese government is contemplating how to ease restrictions like free speech, or not — see my interview with Chinese blogger Isaac Mao or my coverage of Facebook in China for more on that. On the other hand, Chinese entrepreneurs and investors know that in many cases, the government will turn a blind eye to things it declares against the law. These Chinese video sites, it appears, are living on the bleeding edge of what’s permissible, emphasis on bleeding.

How To Interpret VC Response To Your Market Testing

by Mark Peter Davis

This technique will enable you to get a sense for one investor's interest level well before you go out to market to raise money, enabling you to better predict how much time to alot to the process. 

• If the VC expresses interest in learning more and potentially investing now, you'll know that it might not take long to raise money in the future. 
• If they point out some concerns but suggest that you stay in touch, you might be in more a medium to long process and you'll need to start early. 
• And, if they give you feedback but no indication of interest, you might fall into either of the long fundraising process or will never raise capital categories.

It's worth taking this feedback with a grain of salt; VCs have very different views of the world and it's possible that the VC you spoke to may not be the best indication of the market for your company.  If they didn't indicate any interest, the best way to interpret the implications of their feedback for your company's fundraising future is to determine what type of feedback they gave you.  In my post, Why You Might Not Get The Meeting, I describe three reasons why a VC might not be interested. 

• If it's a business model concern, you may want to re-evaluate your business.
• If it's an investment opportunity issue you should re-evaluate your fundraising strategy; VCs may not be the right fit. 
• If it was a fit with the thesis issue, you may simply need to find the right VC.

What do VCs want from their CEOs

by Dimitry Herman.

What do VCs really want from their CEOs? A recent study by VentureOne shows that #1 is sales and marketing, followed by operations leadership, financial management and product development.

The study summary can be found here .

This study of VCs and CEOs reflects some interesting, but not surprising statistics about board members in startups and tech companies.

• most companies have 4-7 board seats, with 4-5 being the highest out of that range. 5 is a pretty common number, since that avoids a deadlock.
• in about 1/3 of the companies, the VCs hold 20-40% of the seats; in about 1/3, it's 40-60%. Again, a board of 5, 1-2 seats is commonplace.
• conversely, company management holds 20% or less on most boards - 1 seat for the CEO then in office is pretty common. If that CEO is also the founder, and later is displaced from the CEO office, it is common for the founder to remain as the Chairman of the Board.
• As far as compensation for Board membership, it looks like most companies do not compensate their directors in any way, and that a minority does so with stock options. Cash and stock seems to be a more phenomenon, which makes a lot of sense considering how cash dependent most startups tend to be.
• It is a bit surprising to find that both VCs and CEO agreed that the most significant value of a VC boardmember is for help with financings and locating investors. The answer I would have expected from the VCs is their business expertise and strategic vision is their most valuable asset. Sales and marketing experience is valued, albeit in second place.
• Finally, "dilution of investment" is cited as the biggest factor of conflict on a board. This is a good reminder that while your investors are usually aligned with the founder's interests, when it comes investment time, all bets are usually off and its every man (or VC) for him/herself. This is especially true if you have been lucky enough to have had multiple investment rounds (or "series") and have various illustrious investors on your board. Since this is something that most investors fully acknowledge, founders should not be afraid to voice their concerns about potential conflicts and should seek to have at least some disinterested (independent) directors on their board.