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

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… Read more

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… Read more

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… Read more

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

I’m getting a lot of questions these days about early round valuations – specifically for angel rounds.  While these vary over time, and by segment, most of them tend to settle into a pretty tight range for early stage angel investments.  I’ve talked about the different approaches – either a “convertible debt” or a “light preferred” – in the past.  I’ve also stated that I prefer the light preferred approach.

So – assuming you are doing a light preferred – what is a fair price?  I’ve been doing these types of investments for the past 12 years and I’ve investment in companies where the pre-money valuation has ranged from $250k to $5m and the amount raised has ranged from $50k to $2m.  While there are obviously some outliers, the… Read more

I received the following question recently:

Just want to ask you a question. I’m looking to bring in a couple of advisors for my startup, how much stock and the approximate % of equity should I give that’s fair to the advisors for their invaluable advice? I was thinking of 100,000 shares each that equates to 1% company equity. Can you advice me on what’s the norm?

1% is rich.  In the past, I’ve given some ground rules for equity grants for directors – 1% vesting over four years is at the top end of the range.  Advisors typically (although not always) contribute much less value to a company than directors and their equity grant should correspondingly be less.  Of course, the amount you give depends on a number of factors… Read more

I received the following question on pricing stock options recently.

In a post you wrote last year, you said “Let’s also assume that company did a financing and is worth $10.5m post-money (e.g. $3 / share), that the financing was done with preferred stock, and the board determined that the fair market value (FMV) for the common stock is $0.30 / share (common stock in a venture-backed company is often valued at 10% – 25% of the preferred – I’ll leave that for a separate post.)” Could you help explain the justification for the 10% – 25%?

A year ago when I wrote that post, I hadn’t thought much about the implication of the new IRS regulation 409A.  While a draft had been published, it didn’t really catch the attention… Read more

Following is a question I got the other day.

We have some people who are currently interested in doing a Series A round with us.  They aren’t VC’s – they’re a company in our market who offer a pile of services complimentary to ours (they aren’t competitors, or substitutes.)  In our conversations with them, they’re asking for a Right of First Refusal – I know this is standard stuff, however, they’re asking for a ROFR for acquisition offers, as well.  Their reasoning (which is valid), is that they don’t want one of their competitors coming and buying us outright – they’d want to do it themselves. My question is, in an acquisition scenario, will this type of ROFR cause problems that make us a less appealing acquisition?  What type of issues

As a follow up to my MBA post from yesterday, I noticed an article in BusinessWeek titled “Can a Personal MBA Match the Real McCoy?”  Interesting and provocative content, along with a few interesting links for those of you thinking about an MBA… Read more

I got a fun question in my inbox recently from a long time reader of this blog.  This answer is aimed at those of you who have ever thought about going to business school.

I’m an entrepreneur, software developer, and occasional angel investor, who is thinking about going to business school. I’m looking for something new to do, either in VC or in finance more generally, and want to use business school as a way to change career direction. Since I live in the Bay area, I talked to the Stanford GSB admissions office, which recommended that I apply for their Sloan Fellows program. I did so and was recently accepted, but upon further investigation I’m a little worried because, as you may know, the Sloan program is a one-year program

I can’t seem to get away from the “what structure should I use to set up my business” questions.  Here’s another one that I recently got.

I am trying to help an entrepreneur set up a distributorship to take US made products (tools) to a large market in asia with a huge need. Start up costs are under $1 million (5-10 angels and insiders), with proceeds going to pay for initial inventory take downs, field sales and support, and minimal opex. We do not foresee a future liquidity event for return of capital but rather generation of cash consistent with a distributorship. Question: what is the best equity structure for this company?

Given my recent post on S-Corp’s vs. LLC’s I’d lean toward an S-Corp (assuming all the investors are US-based)… Read more

Jason and I have mentioned accredited investors several times in various postings on this blog.  However, after I received the following question, I realized we had never talked about why non-accredited investors are an issue for a company.  The question I received follows:

Do you have any stories or insight into the dangers of non-accredited investors? I’m currently attempting to work out a messy deal where some of the original (and potentially very unhappy) investors come in all flavors – sophisticated and accredited, unsophisticated and accredited, sophisticated and unaccredited, and of course, unsophisticated and unaccredited.  I’d love to see a post on the subject in your blog, should you have the insight and interest.

For those of you that don’t know what an accredited investor is, the SEC provides a very

I received the following question last week. It’s a good one – very chewy – and my answer is given from my frame of reference (e.g. a managing partner in a large VC fund).  Consequently, I’m not sure that my answer is either generally correct or abstractable to all situations. How’s that for a hedge? The question is:

Do you agree or disagree with the following scenario as a firm basis for Web 2.0 ventures: Raise $2 to $6 million to be spent over a two to three year period, with an exit of a $20 to $50 million sale to one of the GEMAYANI’s. Would you adjust those numbers significantly, as a general thesis? Is such a venture model an attractive VC proposition, by definition, or maybe merely acceptable in the

I received the following question earlier this week.  It’s conveniently timed, as I recently participated in two angel investments – each with one of the structures defined below.

What’s the best/preferred structure of investment money pre-VC investment. We’re in the beginnings of raising angel capital (~500k) and were wondering what, if any, considerations we should make regarding the investments to allow for VC later. Should we take convertible loans or issue straight preferred stock? What are the other options that are out there for investment structure? Is it too much of a hassle to handle future investments when there is an “angel group (say 5 doctors banded together)” versus a singular angel?

Assuming that you are planning on raising VC money some time in the future, there… Read more