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Hi, I’m Brad Feld, a managing director at the Foundry Group who lives in Boulder, Colorado. I invest in software and Internet companies around the US, run marathons and read a lot.

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Question Regarding NDA’s

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NDA’s (Non-Disclosure Agreements) seem to be floating around this weekend.  I guess whoever leaked the rumor of Google’ acquisition of Youtube hadn’t signed one.  I got the following question from a reader:

We have a partner that we want to work with. They have both overlapping technology but also crucial technology and knowledge that would take a great effort and time to acquire. We know for sure that this company has recently been or is in the process of being acquired. (by a top 10 media & technology company). Our partnership has never entered into a formal agreement but we are now at a point where we want it to be formalized. They want us to sign an NDA to continue the process, which in any other case would be totally normal. However, things have changed slightly and we’re not dealing with a startup anymore but a major media & technology company. Is there a way we can agree to sign an NDA and at the same time protect ourselves from the lawyers from their acquirer if (potentially) our technology, product or business models is conflicting with theirs? They don’t know that we know the details of the acquisition.

Feeling lazy tonight, I passed it on to Jason who provided the following answer.

Let us start by saying that you should definitely consult your attorneys on this.  That being said, here are some things to consider.  Since you already have a relationship with this company and you both realize that you have some overlapping technology, it wouldn’t actually seem unreasonable for you to explicitly limit the NDA to your partner’s company and not its successors.  This shouldn’t tip any hat that you know about the potential acquisition, as it would be a standard thing to ask for given your current relationship.

Where you may run into a problem is if your partner has their attorney review the NDA in light of the potential acquisition.  They’ll want the NDA to run to the acquirer.  In fact, them signing an NDA without running to an acquirer would not be wise for them to sign, but in our experience, most companies do not use legal counsel to review NDAs, so you might have an easier time at this than you think. 

Now if this isn’t possible, then your best fallback position is to limit information pertaining to the NDA to information given to you by certain individuals of the company (so that acquirer employees aren’t covered) and to keep the time limit as short as possible.  This is clearly a sub optimal solution, as the acquirer is still acquiring the rights under the NDA, but at least it is limited post merger.

Mental Stamina for Athletes

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I got an interesting question from one of my friends / readers that applies to both athletes and entrepreneurs.

Can you share with me what kind of mental “training” you undertake before, during and after competing in a marathon? I understand that training for a marathon involves a lot of physical training. But how do you mentally prepare to run 26.2 miles? And how do you maintain your mental “stamina”during such a long run? Finally, how do you mentally “cool down” after competing?

Anyone that knows me, or has worked with me, knows that in addition to being able to cover a wide range of things simultaneously (dare I use the overused phrase “multitask”), I can also go very deep on one thing for a long period of time.  It’s this second trait that I think is so important for both serious athletes as well as great entrepreneurs.

I’m not really sure how I’ve “trained” for this.  I’ve always enjoyed going after stuff with great intensity – often single-minded – although the normal ebb and flow of most of my life has always involved numerous interesting things going on at the same time.  Being able to quickly shift between the two modes – and recognize which one I’m in – has always been relatively easy for me.

The “pre-event” training seems straightforward – I spend deep, isolated time on my running.  I usually run alone (although I’ll do some long runs with other people), I have a routine I go through before each run, and I set my goal in advance and stick to it.  Building up consistency is key – when I’m resting from a marathon I just run whenever I want to.  When – like now – I’m in a training cycle (I’m running a marathon on Labor Day) – I do my pre-determined schedule whether or not I feel like it.  Occasionally I’ll find myself punting on this schedule – whenever I do I think hard about why and adjust accordingly.  Being rigorous, consistent, and deliberate, while studying any deviations, is the basis for my mental preparation.

Leading up to the race, I have a ritual that I’ve now settled into.  Unlike a baseball batter tapping the plate in the same place (or – if you are a tennis fan – Nadal adjusting his underwear between every point) to focus his concentration, I try not to have them become obsessive tasks that I repeat over and over again.  Instead, I focus on the macro – Amy and I go to the city I’m running in at least four days before the race, we stay at a comfortable place, I eat pasta with marinara sauce and lots of bread for the two days before the race, we drive the course the day before the race, and we go to bed early – even if I don’t feel like it – the night before.

During the race, I break my run into four section – (a) miles 1–6; (b) miles 7–13.1; (c) miles 13.2–20; (d) miles 21–26.2.  Having run seven of these things, my experiences have become very similar.  Section (a) is uncomfortable – too many people, not warmed up, over excited – but I just get through it.  Section (b) is the best – I feel great, I’m warm, I’m happy, and I always feel like I’m in a groove.  Section (c) is the hardest – I’m lonely, I hate this part, I have doubt, my knee feels funny, why the fuck am I doing this again, man this is taking forever.  Section (d) is hard, but satisfying – I know I can run 6 miles any day of the week.  Defining the general parameters of the experience in advance takes away a lot of uncertainty for me – I can concentrate on doing my best within the parameters I’m used to.  And – when the unexpected invariably comes up, I can quickly shift my attention to it.

After the race, I just chill.  I don’t plan anything for two days, I don’t travel, I lay in bed all day the next day (if I feel like it) or I walk around and play with friends (if I feel like it.)  My recovery time has averaged three to five days – it’s getting faster with each marathon.  However, I’ve learned that I shouldn’t run a step for three weeks – I don’t lose any meaningful fitness and – when I start running again – I’m reading to go.

Entrepreneurship has a lot of similar characteristics.  It’s fascinating to watch (and work with) successful multi-time entrepreneurs – create a metaphor around what I’ve described above, stretch it out in time, and it maps pretty closely.  No wonder the cliche “entrepreneurship is a marathon, not a sprint” is so popular.

How An Entrepreneur Can Protect Himself Post-Funding

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On this spectacular fourth of July (at least in Homer – it’s 60 degrees and not a cloud in the sky), I was enjoying disk 2 of Atlas Shrugged (I’m about 300 pages in) on my run today.  I’m deep into the section where all the competent people are quitting and walking off the playing field and the looters are ratcheting up the rules, which have the unintended consequence of destroying the world as they know it.  Hank is still fighting it out trying to hold everything together in an increasingly bleak world and Dagny is on her quest to find the inventor of the motor as she naively thinks that will solve everything.  The contrasts of the section I’m listening to lingered in my mind long after my run, especially as I pondered the state of affairs (good and bad) in our country 230 years after our birth.

When I sat back down at my computer, a question a that I got a few weeks ago from a reader jumped out at me.  The question follows:

If you are an entrepreneur leading a start-up, and you are negotiating investment with a strategic investor or VC, what are the standard or most desirable ways to protect yourself personally now that you have the potential to be fired?   Lets say they want to get rid of you in 6 months, and have the ability to do that, what type of parachute or provisions should the founder have on the front end to make sure they are covered in the event of being dismissed or benched?  Issues like whether you can be fired at all or just assigned a new role, severance salary/term and protecting your equity.  I have heard that covering yourself personally is among the most important terms to negotiate in a term sheet as the founder.    If by securing funding you are also unwittingly arranging your own personal demise, what precautions should you take. 

I might have answered this differently if it (a) wasn’t the 4th of July and (b) I hadn’t just listened to a particularly disheartening section of Atlas Shrugged.  While Jason and I covered the basics in our post on Vesting and part of our Term Sheet series, that only covers one aspect of the question – namely that of what is standard and fair in protecting your stock position.  While some VCs and entrepreneurs will try to negotiate employment agreements as part of a financing, I hate these.

If – as the entrepreneur – you are competent – it’s unlikely the premise above is valid.  Specifically, very few VCs invest in a company with the idea of firing the CEO in six months.  While many CEOs get replaced – and it’s often not pretty – it’s rarely because the new investor coming into a company thought – a priori – I want to get rid of this guy right after I invest.

As a result, I think the most effective approach for an entrepreneur is to punt completely on the employment agreement and issue of “employment protection.”  An open, direct discussion with the new investor is key – if the VC believes the entrepreneur should be playing a role other than CEO, get this out in the open in advance of the financing.  The entrepreneur should also do the leg work to understand the history of the investor – is this an investor that stands behind the entrepreneurs he funds or does he have a history of revolving door management?  When things don’t work out, how does the investor behave – is he fair and appropriate?  While you can’t always pick your investor, you certainly can know what you are getting yourself into.

I believe a combination of competence and transparency is the best approach.  If you are an excellent CEO, completely open with your investors about the good and the bad, diligent about trying to make the company successful, and completely open to feedback and constructive criticism, it’s unlikely that you’ll randomly get fired.  If the company isn’t performing, or you are struggling in your role, being open, honest, and proactive with your investors will almost always be much more effective than “employment protection.”  Occasionally you’ll run into “a bad investor” who has nefarious motives, but the world is small and life is short so this shouldn’t be that hard to figure out in advance.

While a cynical entrepreneur might paint this as an idealistic perspective, I’ve found that the real trust between the entrepreneur and investor is much more important than a legal agreement that immediately polarizes people before they’ve even started working together.

When Does An Entrepreneur Need “Experienced Help”

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A blog reader who I know and have worked with in the past asked me the following question:

I was interested in your thoughts on when entrepreneurs realize they need experienced help and have taken the company as far as they can, when they let go, when they stay too long and the real smart ones that know when to bring someone like me in early and work with me instead of fighting against me.

This friend has been the number two guy in several companies.  In each case, he was brought in by the entrepreneur as the CFO or the COO.  In the situations I’m aware of, he was initially welcomed by the entrepreneur (who – in each case – was the CEO and had an autocratic style), but – after a while, started to have real difficulty working with the entrepreneur, especially as the company outgrew the entrepreneur’s experience base.

As I pondered this question, which would require an entire book to really address it, I realized there was a parallel issue in all the situations I was aware of.  My friend is an extremely capable medium stage executive.  He’s not a raw startup guy, but he knows what to do from 50 to 1,000 people.  In each case that I’m aware of, the entrepreneur “brought him in” to help “get the company to the next level” (where have you heard that before.)  However, the entrepreneur / CEO didn’t really cede control and – when my friend started to put his mark on the company, a very predictable friction occurred.

While I think this kind of relationship is possible, it’s critical that the entrepreneur and the new executive agree on roles and rules of engagement up front.  I think the biggest problem is that during the recruiting process, both sides are selling the other side on their desire to work together and their ultimately flexibility.  Since the entrepreneur is looking to hire and the executive is looking for a job, there’s a fundamental conflict in their motivations and the honest, difficult, confrontational stuff doesn’t come out – until later.

My simple advice to my friend – once you get past the “selling part” of the process and have a real offer on the table from the entrepreneur, go out to dinner (or better yet – get on a plane and go somewhere together for the weekend) and have the real conversation about what life is going to be like.  See if you can get the issues out on the table before you accept the job.  If you can, listen carefully, engage, and see where you go.  If you can’t, you just learned something huge.

Predictably, the same information applies when an entrepreneur is considering a new investor – VC or otherwise. 

Giving Up Salary for Equity After VC Funding

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I got a great question the other day which highlights the tension that can emerge in an early stage company between VCs and entrepreneurs.

Company X – which is VC backed – has six months of cash in the bank.  Almost every employee could go without a paycheck.  The team is on full pay now – it’s a small team of under 10.  Not taking salaries buys the company another six months.  There is a major launch in about four months.

An option the team is discussing is that if the current investors won’t throw in another million now so they have room to raise money after the results of the launch, they will “self finance” the company by everyone cutting pay if the investors issue a significant additional chunk in common to the employees

What are the issues for the team in doing something like this have you seen it, when not in a “difficult” situation?

While there is no tension yet, here’s a negative view of how this could play out.  The entrepreneurs ask the VCs to put up money – presumably at a certain price – in exchange for buying another six months of runway.  The VCs don’t like the price the entrepreneurs suggestion (presumably it’s too high) and offer to do a bridge loan with warrant coverage or an equity round at a lower price.  The entrepreneurs don’t like this, so they tell the VCs they’d rather go without salary for six months and get stock equivalent to what the VCs would have gotten (at the lower price of course) for their investment.  The VCs don’t like this because (a) they aren’t getting money to work, (b) they are ending up with less, not more of the company, and (c) they potentially lose some of the control over the financing dynamics.  After much handwringing (and wasted time), everyone comes to an agreement on the amount of stock the entrepreneurs and staff get for going without salary for the next six months.

Wind the clock forward.  The entrepreneurs have an “ok” launch, but the valuation for the new round is lower than they expected or there is no outside lead and the VCs start talking about an inside round.  The VCs have no incentive to get the valuation up in this case – they are focused on buying up more ownership, so they’d rather have a lower valuation anyway.  The entrepreneurs are pissed because they just gave up salaries for six months but didn’t end up in the “better” position they wanted.  The VCs aren’t appropriately sympathetic (at least in the entrepreneurs mind) to the situation – the entrepreneurs just made an investment they aren’t getting credit for.

Tension mounts.  No one is happy. 

While it’s a logical trade, it’s an uncertain one for the entrepreneur because there is no way to predict whether or not the launch will be successful, so fundamentally the entrepreneur is buying more runway, but not necessarily for the exchange of more ownership.  Of course, in the positive situation (where the launch goes great and new investors show up willing to invest at meaningfully higher prices) this could work out nicely. 

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