Category Archives: Advice

A Case Study on Startup Equity

Business Ethics, Starting a Business, ,

I had an interesting exchange over the weekend. Shane Diffily tweeted:

Setting the Scene

Shane was referring there to a post on startup equity I did a while back, highlighting the problems that happen all too often as founders fail to define their own functions and ownership, in writing, in time. The situation I described was a hypothetical. Here’s a quick summary of that post for you:

Parker  comes up with a great idea for an iPhone application, and works on it for three months in spare time. … develops sketches and designs…

About three months into it, Parker has spent maybe 10 to 20 hours on it so far. [enter Leslie, programmer] … Leslie is excited, which rekindles Parker’s excitement. They agree to be partners in a new business based on this initial iPhone application.

Four months go by. Leslie … gets into the code … discovers Parker’s initial idea isn’t quite possible … revises the idea radically, makes it practical and develops a prototype. Parker meets with him three times, they talk, she accepts his changes begrudgingly. At this point Parker’s total hours have gone from 15 to 25, but Leslie has worked a lot, probably 120 hours, on the programming. … [they] … take the prototype to Terry, who has been through a failed startup, has a business education and is looking for a startup to do again … Terry does a business plan and networks with local business development groups to find angel investors. They win an opportunity to present to an angel investment group. Another three months have gone by. Parker has now put in more like 40 hours, Leslie 250 hours, and Terry 120 hours. Leslie wants to quit a current job and work full-time on the new thing but needs to get paid. Parker doesn’t want to quit a current job but wants to stay involved; she’s not quite sure how. Terry wants to lead the new company as soon as he can get financing.

I asked three questions at the end of the post. I asked, but didn’t answer them:

  1. How would you suggest that Parker, Leslie and Terry divide up the 100 percent ownership of the company now, before they go to the angel investors. Who owns how much?What do you think of the management team here?
  2. Leslie and Terry both want to work full-time on the business when there’s money to pay them. What titles should they take? How much salary?
  3. How much of the company should these three offer to the seed investor for $250,000?

Pre-money Valuation

It was relatively easy to answer the third for Shane. I put it into a tweet:

“Pre-money” means the valuation for the transaction with the initial seed round investors. To clarify, “post-money” would be the valuation after new investment funds are received. So if “pre-money” was $750K, then the angel investors’ $250K would buy 33.3% of the shares and the founders would end up with 66.7% of a business values post-money at $1 million.

I can’t get more specific than that without filling in some value judgments about the relative value of the application, the presumed product-market fit, and the credibility of the team. If all three factors are positive, then I’d suggest starting the negotiation with a valuation of $1 million. That would give the angels 25% ownership and the founders 75%. That leaves enough equity for future rounds. Otherwise, if the deal isn’t that stellar, then the three founders would have to go down to $750K or even $500K, hoping to get some angel investment to develop traction and increase the valuation later.

For the sake of explaining dilution, I’m going to go with the $750K valuation for the discussion on dilution below.

Startup Equity

Shane then asked the much harder question:

Keep in mind that I just made these people up and imagined an unspecified iPhone app without describing what it does for whom. In the real world it would take a lot more of understanding who these three people are and how credible their real skills. Here’s what I think:

  1. First, Parker can’t have much equity because she hasn’t done that much. Her initial idea didn’t work. She has put in only 40 of the 410 hours (less than 10%) and her hours weren’t all that useful. Still, she was the originator, she came up with the market need, and she set the wheels in motion. So she should stay involved as long as she wants. However – also very important – Parker doesn’t even want a full-time job. I’d ask her to take 10% of the pre-investment 100% shared by the founders. And I’d give her a seat on the three-person early board of directors, with the assumption that she’s going to go off to make room for investors.
  2. With Terry and Leslie, I’d put Terry in charge and at the top of the business, with a title like CEO or President or some such; and Leslie should be the technology/product development lead, reporting to Terry. I’d want both of them to take minimum possible full-time salaries as soon as possible, Terry’s a bit more than Leslie’s. Their salaries should be a compromise, enough to support them and their families, but less than market value because they have to keep the burn rate low. And I’d want to get their salaries up to their market value as soon as possible. In a real company, if it’s going to make it, the people it depends on get paid.
  3. I’d want Leslie to take 50% of the founders’ 100%, and Terry 40%, bringing the total, including Parker’s 10%, to 100%.

Why? Obviously I’m making some assumptions on the unknowns. I assume that Terry has a credible background in startups and holds up as lead founder. I assume Leslie has a credible background in tech and can run the technology, even as the business grows. I assume Parker has knowledge and experience beyond just the idea, and can contribute to the business even if not an employee. I assume all three are there for the long term.

I confess to some bias here too. I don’t believe the original idea has much value without ongoing contribution. I do believe in product-driven businesses, and technology-driven businesses, which is why I end up giving Leslie more equity than Terry. And I assume Terry’s MBA is a healthy number of years in the past, which means (to me) that it has been tempered in the field and has more value.

Valuation and Dilution

founder-shares-and-dilutionAfter angel investors put in $250K, they own one third of the shares. Usually the legal work is done with preferred shares and more subtlety, but, for purpose of illustration, let’s assume this is all done with common shares and the total founders’ shares, before the angel investment are 1,000. That’s a small number because startup attorneys usually write up the original corporate documents with more shares, such as 10 million instead of the 1,000 I’m showing. I’m using these simple numbers because it shows how the founders are diluted when the angel investors join the ownership. Each of the founders retains the founder shares he or she has, but the additional shares mean that they end up owning less of the company than they did before the deal.

 

Startups and Business Owners: The ‘Have to Do’ Factor is Infinite

Advice, Starting a Business, Work Life Balance,

This should be so horribly obvious:Work is Infinite

Your business exists to make your life better. Not vice-versa. Don’t live to make your business better.

Obvious? Sure. But people forget.

Do you use what you “have to do” for your business as the constant recurring excuse for missing things that matter to people you love – soccer games, recitals, appointments, and so on? I’m sure you’ve heard the oft-repeated saying about people on their death beds not wishing they’d spent more time in the office.

I think the “have to do” factor for entrepreneurs, startups, and small business owners is essentially infinite. If you are one of us, then you can – if you want – always find a “good” business reason to not do anything but the business for the rest of your life, non stop, without anything else.

So you have to draw lines and set priorities. As I was building my business my wife insisted I be home for family dinner every night I wasn’t traveling. I objected at times, but looking back, with the kids all grown up. I’m so glad. And she set vacations and paid deposits months in advance, so we had them. I’m glad for that too.

You know this. But so did I, and I would have really screwed this up without reminders. So this is your reminder. Life is more important than business.

(image: shutterstock.com)

(Originally published in Planning Startups Stories)

Don’t Underestimate the Power of Fear When Public Speaking

Presentation skills, True Stories, , ,

Whether you’re making a speech before thousands of people in an auditorium or just two people in the small conference room, there are professionals who proclaim confidence is key. Stay poised – be bold – win your audience with self-confidence.

I’ve noticed a much different pattern with myself, though, when public speaking. It came up again just this week when I did a segment at the Ready to Launch conference in New York, sponsored by Entrepreneur.com and Canon. (That’s me on Tuesday in the image here … and my thanks to fellow-speaker Ivana Taylor of DIYMarketers for that picture.) 

Tim Berry Ready2Launch by Ivana Taylor

My job has always required a lot of speaking even when I was still pretty young. Before I was 25 I had done radio and standup television for UPI out of Mexico City. When I was in my 30s, I did workshops and speaking dates at trade shows like Comdex. And I’ve been doing business planning and startup workshops, and teaching, and some large-group speaking ever since.In spite of my decades of experience, however, I still have a fear of public speaking – and I wonder if this holds true for others. I still lose sleep the night before and worry about the outcome. Sometimes this type of anxiety can hold people back. With me, it’s just the opposite.

Newsflash: A little fear never hurt anybody

For many years, certainly for most of my career, there was a strong correlation between nervousness and doing well. Strange, I suppose, but true: the more nervous I got beforehand, the better I did. When I’d be tossing and turning all of the night before my talk, or had that embarrassing dry mouth and shaking hands at the beginning of a talk, I’d end up doing better.

Confidence seemed to be a bad sign. For years, for most of my career, if I was cool and calm then my performance was not as good.

Some of my anxiety wore off a little by the time I reached maybe 50 years old. But even now, with the big groups, the 1,000-seat auditoriums, I still get nervous and the stage fright or whatever that is tends to make me perform (as far as I can tell) better, not worse.

Ignore the nerves and jump right in

Sometimes, out of nervousness, speakers tend to prepare long preambles to an actual speech. While you may think it gives your time to gain confidence while trying to connect with an audience, chances are, your audience is tuning out. And by the time you get to the meat of your talk, no one may be listening.

I like this advice: Start in the middle. Start at the most interesting point. Choose powerful first words, with immediate interest. Grab your audience quickly. The worst ways to start a presentation (or any story) is “My name is ___ and I’d like to talk to you about…”

I recently listened (again) to JD Schramm’s speech on How to Tell Your Story for Impact. A Stanford business school communications lecturer, Schramm advises people skip the boring preamble altogether. He says:

Many times we feel like we have to do a lot of prefacing, but four minutes goes by quickly. If you spend two minutes on background, you’ve lost an opportunity to grab attention. Far better to leave the identifying bits until the second paragraph, or to the overhead PowerPoint image, or to the person charged with giving the introductions.

Schramm has also posted the speech on YouTube.  Be sure you get to about 27 minutes into his talk where he starts talking about seven habits of concise storytelling and take note of all seven.

In the end, I think the best way to survive a fear of speaking is to just do it, over and over again. And really, a little nervousness keeps it real for both you and your audience. Do you agree?

Rant: Entrepreneurship, Dropouts, and Bad PR

Business Ethics, Entrepreneurship, Rants

I was writing an email to these folks and I just stopped and deleted the draft. Why waste the time raising entrepreneurs I don’t even know.book cover

My complaint? I got to my office this morning after a few weeks elsewhere and found the results of a concentrated campaign for me to write about a certain entrepreneur and his startup. He’s all about how he’s so successful as a college dropout. I have one package containing a coffee mug with chocolate drops, and another with a copy of his book. Both contain a personalized letter from him, with what looks like a signature. Both contain business cards that are ‘sort of’ from him, but not exactly. And the only contact info I get is an impersonal email address info@[company omitted].

So, let’s get this straight: You want me to write about you, but you don’t even give me your email address? Is that just me, or is it insulting?

I connected this to multiple emails from somebody in his company, pitching me talking to him or interviewing him, also without including his email address. I’d say WTF, but I’m more mild mannered than that, so only WTH.

Besides, the college dropout theme ticks me off. The illustration here is taken from the cover of his self-published book. And the email campaign spins off the college dropout thing. I think that’s building your image around what’s essentially bad advice.

One thing is all the reasons like you or the next person or anybody else had to drop out of college — too bad, but common enough, and nothing for me to judge — but quite another is purposely building your entrepreneurship pitch around you having dropped out of college. Yeah, sure, Bill Gates, Steve Jobs, and Mark Zuckerberg, I know. But none of them ever made that his secret sauce; the college dropout thing just happened. Bill Gates regrets dropping out of college. Steve Jobs hung around Reed College for the education, even after he dropped out. And Zuckerberg? OK he had a tiger by the tail, who can blame him?  But does he go around bragging about it?

Sadly, formal education becomes a luxury for some. I wish it were available for all. But I’m sure anybody who can get an education is better off with it than without it. And that goes for entrepreneurs too. No, you don’t learn to be an entrepreneur in courses. But what you do learn doesn’t hurt. And there’s a whole life outside of business.

3 Things Never to Tell an Entrepreneur About her/his Spouse

Advice, Business Mistakes, Entrepreneurship, Rants, , ,

I just read 7 Things Never to Tell Your Spouse About Business Finances, posted by Barry Molz on Amex OPEN forum. I like Barry and I like his work.  I’ve been on his podcast before and it was great. But his tone of voice in this post makes me uncomfortable. Dont tell your spouse

If you’re curious, compare Barry’s tone in that post to mine in some of my (somewhat confessional) posts on me and my wife and entrepreneurship: My biggest startup boost, for example; or this true story on relationships vs. new business. And yes, my wife and I have been married 44 years, in a relationship that has survived years of scraping to support a startup, and sending five kids through college; so maybe I maybe I know something about this.

It’s not that Barry doesn’t offer some good advice within his post. He does. For example, if you’re dealing with cash flow problems, Barry advises:

Don’t give your spouse a daily cash report, since it’s always changing. Instead say, “Money will be tight for the rest of the year.” You will be right most of the time.

But there is no excuse for the multiple references to the spouse as “she” in that post. I know Barry and he knows better. This is nasty stereotyping. The whole “don’t worry your pretty head” motif is 1.) offensive and 2.) obsolete. Ironically, all of Barry’s advice here has nothing to do with gender so there is no reason whatsoever to make the spouse female. Making the advice gender specific dilutes it.

And secondly, regardless of gender, keeping a spouse in the dark about serious business issues is a really bad idea. Specifically, Barry’s suggestion about what to tell a spouse when a major investor pulls out …

Don’t say anything, and work privately to learn to project your cash flow better so you can survive the bumps in the road.

… is really bad advice. What a terrible thing to suggest. First of all, that idea makes for an incredibly lonely entrepreneur. Nobody normal can help fretting over that kind of situation. Not to share it with the most important person in your life, who is by definition a person who is going to share the consequences if you go under is horrendously bad advice.

And here’s another piece of really bad (well, maybe just insulting) advice on what to say when you have a buyer for the company:

If you do tell her about any pending deals, make sure she understands that nothing is set in stone until the money is in the bank. Also, don’t give her the dollar details; when the deal closes and the money is in the bank you can say: “Honey, what can we do with an extra $100 million?

The first part of that advice is not bad, but condescending, and unfortunately also gender specific. The second part is insulting.

My apologies to Barry for a bit of a rant, but I’m the father of four daughters and this stuff really gets my goat.

I’ve discussed this topic in other posts and in my opinion it’s best to be open and honest with your partner. In fact, being candid has immense benefits. Here’s an extract from one of my previous posts that illustrates how essential my partner has been in helping me to succeed:

[This was the] biggest boost to starting a business: My wife said “go for it; you can do it.” And she meant it. At several key points along the way, she made it clear that we would take the risk together. There was never the threat of “I told you so, why did you leave a good job, you idiot!” What she said was “if you fail, we’ll fail together, and then we’ll figure it out. We’ll be okay.”

True Story: Don’t Compromise Your Ethics in a Software Startup

Business Ethics, ,

This is Heidi Roizen talking about the old days of  Silicon Valley software startup (T/Maker), with a true story about an ethical choice she and her co-founder brother Peter made. It’s less than three minutes and it’s a perfect example of the kind of thing that happens all the time; and the choices you as business owner and/or entrepreneur need to make.

My thanks to Stanford Business School’s Ecorner for making this available.

(If for any reason you don’t see it on this page, here’s the link to the source in YouTube.

Drill Down into What You Do Best

Advice, Leadership, Starting a Business, ,

I put this here today because I love this quote:

“I wanted to fundamentally feel like I was the best person in the world to solve that problem.”

This is Tristan Walker, of Walker and Company Brands, speaking at Stanford, courtesy of Stanford eCorner. If you don’t see the video here, please click here for the source.
http://ecorner.stanford.edu/embeddedPlayer.html?mid=3308&width=500

I’m Too Busy To Read That Book on Busyness

Books, Personal Productivity, , ,

This interesting book review came out this morning on slate.com:

Slate.com book review Overwhelmed Brigid Schulte

In her new book, Overwhelmed: Work, Love, and Play When No One Has the Time, Washington Post reporter Brigid Schulte calls this cultural epidemic the “overwhelm,” and it will be immediately recognizable to most working adults. “Always behind and always late, with one more thing and one more thing and one more thing to do before rushing out the door.”

I haven’t read the book and I probably won’t. But I certainly recognize the condition. 

I also like the title on the Slate piece, which you can see in the illustration, and you probably can’t see the subtitle there, which is:

Also, by talking about it so much, you’re wasting time.

Exploring the book, post author Hanna Rosin discovers:

busyness of a certain kind—meaning not the work-three-menial-jobs-and-put-your-kids-in-precarious-day-care-by-necessity kind—became a mark of social status, that somewhere in the drudgery of checklists and the crumpled heaps one could detect a hint of glamour. 

And I liked this thought too:

The answer to feeling oppressively busy, he says, is to stop telling yourself that you’re oppressively busy, because the truth is that we are all much less busy than we think we are. And our consistent insistence that we are busy has created a host of personal and social ills which Schulte reports on in great detail in her book—unnecessary stress, exhaustion, bad decision-making, and, on a bigger level, a conviction that the ideal worker is one who is available at all times because he or she is grateful to be “busy,” and that we should all aspire to the insane schedules of a Silicon Valley entrepreneur.

Last Sunday was a particularly gorgeous Spring day like we don’t often get this time of year in rainy Western Oregon. About mid morning I sat down with a really good cup of coffee and a really good computer looking forward to writing, editing some video, revising a website, and at some point taking a good walk through the university campus. I paused, thought about how I had multiple interesting rewarding things to do, but trouble choosing.

And it occurred to me, at that moment, that having too much to do is a blessing, not a curse. 

Q&A: How Do I Get This Startup Financed?

Q&A, ,

I received this question over the weekend via my ask-me form on timberry.com. I modified it slightly to not include private information. It’s about a web software business. It reads … 

Tim Berry bplans.com timberry.com

… we are gaining traction. Financing is difficult. I am looking to find out what resource you would recommend to get financing for the project. Investment would probably be 100-250k. Would like to go to privates like doctor’s groups but please direct me.

I’ve written a lot about angel investment on this blog and on financing a business in the main articles section on the parent site, bplans.com. Check out particularly this article, the right funding for your business type, which talks about the main options and gives you some basic definitions to work with.  And consider these 5 points: 

  1. Narrow your number. Project sales, cost of sales, fixed costs, spend before launch and development costs and come out with what you think you need. Everybody knows it’s just a guess. But there’s a huge difference in options between $100K and $250K. Name your number and have projections to defend it. Yes, that’s part of a business plan. 
  2. Generally it takes as much legal hassle and legal fixed costs to invest $100,000 as to invest millions. 
  3. If you have to ask about venture capital, you’re not a good candidate. Don’t feel bad about it. Venture capital is very rare, usually goes to high-profile startups led by people who’ve already done it. And the amount you need isn’t enough to interest standard venture capitalists. 
  4. If really have what investors want, you understand the hard truths about startups and investment, and you still think you’re a good candidate for angel investment, go to gust.com, sign up as a startup (it’s free), watch the videos, read the blog posts, and get going. 
  5. If angel investment isn’t likely, then start looking at what they call friends and family, which is what you call doctor’s groups. Talk to your nearest Small Business Development Center (SBDC) (you can find info on these at asbdc-us.org.) The best advice I’ve heard on this is to start asking everybody who they know who might be interested. Don’t ask anybody directly; ask who they know. That’s less awkward and more effective. 

If that doesn’t seem to be getting you anywhere, you should probably read these 10 reasons not to seek investment. And finish up with 5 non-traditional ways to get startup money.