How do you deal with dilution?


good uglyOnce a venture has moved beyond friends and family money and convertible notes or SAFEs, the fundraising option is down to one method: selling equity in the company. And once you take that route you will need to deal with your and your teams’ ownership all being diluted, e.g. ownership in the venture will go down in direct proportion to the amount of money you raise. (The only exception being if you or your co-founders have enough capital to invest in the company alongside the VCs – rarely if ever the case.)

The Techcrunch article by Bernard Moon Dilution: The good, the bad and the ugly is highly recommended reading for those founders raising a Series A for the first time. Bernard Moon is co-founder and partner at SparkLabs Group, a network of accelerators and venture capital funds.

Bernard very helpfully provides the cap tables for three different valuation scenarios which I won’t reiterate here. What I will do is pull out some good advice from the article and add some of my own.

Number one is that most VCs insist on a 20% employee stock option pool. So everyone in the firm will take dilution from the pool immediately. Note that the venture takes this dilution, not the VCs!

Another key point for those who have raised money through convertible debt or a SAFE is that the cap on valuation from those instruments is NOT your company’s valuation for purposes of raising money by selling equity. So don’t get too focused on that valuation when negotiating your valuation with an institutional investor.

Secondly, as Bernard writes, “you need to create investor interest while generating the least amount of friction to quickly close your round.” Welcome to the world of tradeoffs – you’ll be making many as you build your company.

Founders are faced with the Goldilocks problem: if you raise too little money you may well run out of cash before getting your company to the important milestone of positive cash flow. You don’t want to be in that position. But you can also cause problems if you raise too much money. For one thing, you may have sold too much equity at a price much lower than it will be after you hit a major milestone or two. Companies, like people, tend to live up to their incomes, so too much cash is easily spent. Raising enough money to get to a major step up in valuation in your Series B financing round, plus a 20% contingency, should be your goal.

The rule of thumb is that you should raise enough capital to last between 12 and 18 months. Why? For two reasons: one, fund raising is very time intensive, especially for the CEO and is a major distraction for senior management. It also generates anxiety amongst the staff. (How much will I be diluted?) Secondly, your valuation on your series B financing is going to be based on your accomplishments and value added since your Series A. You need to give yourself enough time to hit meaningful milestones.

Your goal should be to have two or more term sheets. Competition drives valuation. If you have a hot startup there will be competition for your Series A. And sometimes T’s and C’s (terms and conditions) vary between investors. Be careful to analyze the terms of the investment and what preferences the investor expects to receive in addition to their equity ownership.

Keep in mind that the founders’ equity upon closing a Series A can go up if the Board later decides to award additional shares to the founder for exceptional performance.

Finally, it’s not all about valuation and percentage ownership. As I was taught by Alan Bufferd, treasurer of MIT and a two-time investor on the part of MIT in my startups, “Everybody’s money is green.” Meaning what value add does your investor bring to the table: Stellar reputation? A great network? Proven help in recruiting world class talent? Ability to syndicate deals with other top flight firms? A partner who will champion your firm far past the Series A closing? High marks from other founders who have taken investment from this firm?

Remember, a small slice of a very, very large pie is much preferable to a large slice of a tiny one! Your job is to bake a very, very large pie!




What’s a mission statement? And why do you need one?


I’ve written previously about vision and mission statements. Today’s post will focus on mission statements with thanks to John Boitnott, author of the excellent article How to Write An Unforgettable Company Mission Statement, subtitled It’s your best and earliest shot at telling employees and the world what you’re about.

What is a mission statement? Very simply it is a statement of purpose for your venture. I discussed this last night in my final presentation to the group of post-docs I’ve been mentoring for the summer. Your venture needs to have a reason to exist. It’s important that you convey this mission clearly and concisely to inform all the stakeholders in your venture: other partners, staff, investors, vendors, the press, analysts, et al. Mission statements help create alignment, a critical success factor for startups. As I’ve previously written:

My vision for Mentorphile is that virtually everyone may need to become an entrepreneur, as the future of work is changing dramatically from globalization and automation. My mission is to help founders succeed by sharing what I have learned from my experience both founding startups and mentoring dozens of founders.

I like to see mission statements of the form “We help X accomplish Y [by doing Z]” Who you help are your customers, how you help them is your product or service. Here are the four criteria John Boitnott lists for a mission statement, with my annotations:

  1. It should be inspirational. It’s the founder’s  job to inspire his team and all other stakeholders in their venture. Your mission statement should fill all who read it with the urge to follow your venture, wherever it leads.
  2. It should be succinct. My rule of thumb for mission (and vision) statements is that you should be able to wake up any staff member in the middle of the night, ask them what the company’s mission is and have 100% recite the answer correctly (then go back to sleep!) The long and complex mission statements often seen with large, legacy corporations fail this test every time.
  3. It should be timeless. The lifetime of a company’s mission statement should be measured in years, not months. Bill Gates’ original mission statement was to put  Microsoft software on every PC in every home and business. Note that he missed mobile! Microsoft’s mission is far more generic these days: “To empower every person and every organization on the planet to achieve more.”
  4. It should reflect the company’s values and purpose. See my post Values: the bedrock of startups. Document your venture’s values before you tackle your mission  statement.

So how do you go about crafting a compelling mission statement. I’ll follow Mr. Boitnott’s list with my own comments.

  1. Address your key stakeholders. See the list above. Note: this should be true of all your  marketing communications.
  2. State your purpose. Why does your business exist? Why did you start it? If your answer is “To make a lot of money” go back and try again. I like Tesla’s mission statement: “To accelerate the world’s transition to sustainable energy.”   That covers both its cars and solar panel businesses.
  3. Use specific, simple language. Again, this is true of all communications, not just mission statements. No business nor technical jargon allowed!
  4. Infuse it with spirit. This is a tough one. But I like this quote from the article:

Try to infuse a bit of that can-do human spirit and energy, and don’t be shy about making bold declarations. One of the best ways to motivate a team is to set a lofty yet attainable goal, then declare it out loud.

5. Don’t needle your statement to death. I don’t agree with this one. Crafting a mission statement that hits the above criteria is hard work. Keep at it. And don’t involve a committee; that’s how you get those long, unwieldy mission statements from legacy corporations.

Before you launch your mission statement make sure you test it out with people who know the company, but weren’t involved in drafting the mission statement. Note that mission statements are completely different from taglines, which are often cute and catchy, but have short shelf lives and are subject to frequent change.

Start out by Googling the mission statement of companies you admire.  For example, here’s Apple’s: To bring the best user experience to its customers through its innovative hardware, software, and service.




Building a business by solving your own problem

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I’m a sucker for startup origin stories. They can tell you a lot about both the founder and the venture. As a mentor I usual start off meetings asking what prompted the founder to start their venture. But the origin stories I like the best are the ones where the founder is trying to solve a problem that they themselves experience. Then the question becomes how many other people have that problem and can a business be built on providing a solution. The article on CNN Business by Michelle TohThis startup helps you find any place on the planet without an address is a great example of such an origin story.

The story of London startup what3words begins with what3words CEO Chris Sheldrick, a former live music organizer. Sheldrick often grew frustrated at poor addressing when he needed to drop off equipment at a convention center or direct a band where to go, Jones said. I had this problem myself when I worked in the sound reinforcement business and often had to struggle to find the right place to load in our equipment at an arena or concert hall. As Giles Jones, the company’s chief marketing officer put it, “Everybody’s got a story of where location has not been good enough.”Addresses “either didn’t exist, they weren’t accurate enough, or they were really difficult to communicate.”

Sheldrick’s first attempt to solve the problem was using GPS coordinates, but the numeric combinations were difficult to remember or share with others. But he managed to cognitive leap about six years ago. “There was a dictionary on the table, and they were like, ‘I wonder how many different words it would take to build a system using words,'” Jones said.

By combining a problem he’d been living with for years, with the observation that a dictionary contains thousands and thousands for words, Sheldrick arrived at an answer to his problem. By combining about 40,000 words in groups of three you can map out specific building entrance, such as at a shopping mall. The company divides up the world into 57 trillion squares, each uniquely identified by a three word address.  The app then opens up another mapping app, such as Google Maps, which then can direct you to the address.

Ok, so far we have a personal problem combined with a unique solution. But how does what3words make money? The app is free to use for the public and non-profits but the company plans to make money by licensing its code to businesses that want to integrate it with their systems. To quote Michelle Toh:

Two of what3words’ investors are logistics firms. Germany’s DB Schenker and the UAE’s Aramexare using the startup’s technology in their systems to help delivery workers know exactly where they’re going, a way to save time.

Other partners are using it to showcase new features on their platforms.
German automaker Daimler (DDAIF), another what3words backer, has adopted it in some of its cars’ navigation systems, letting passengers input three-word addresses by voice.
Another company, theSouth Korean messaging app Kakao,has used what3words as a way to invite users to discover new fishing spots that were previously off the grid.
It turns out that one of my mentees has a venture in the logistics business. I’ll be interested in hearing from him if he sees potential for what3words with his target customers.
There are a couple of interesting lessons embedded in the what3words origin story. While many successful startups might seem like overnight successes, in reality founders often live with a problem for years before finding a solution. Any they may try multiple solutions until hitting on one that works. The other lesson is more subtle: pay attention to your environment. It was observing the dictionary that led to the insight about using a unique set of words to define a location. You never know where a solution to your problem might be lurking, so keep your eyes, and your ears open!

What’s the third option for a company exit?

playbookFor many years I’ve been tutoring founders on ways to exit their startups. And each time I explained that there are three ways: going public, being acquired, or paying off your investors I felt a little silly offering the third alternative, as I’ve never heard of anyone doing that!

But the article Benching your VC: The employee buyout playbook by Yaacov Coehn co-founder and CEO of is worth reading, even if your company is not currently in a position to be acquired.

The article is a case study in a management buyout of a venture capital-funded startup. Here’s the essence of the story in the first paragraph:

Grow or sell? It’s the ultimate dilemma for startups. This dilemma can become even more acute when you’re the CEO of a VC-funded startup. You want to develop your product, while driving sales and marketing, so that the business can reach its full potential, but your VC’s fund has reached maturity and they want you to sell your company to a larger firm. What do you do when your values as a business leader come into conflict with your investors?

Not only have three of my startups been acquired, but I worked on acquiring three companies when I was working for the Thomson Corporation (now Thomson Reuters). So I’ve seen both sides of this dilemma. Fortunately for me, our investors were tremendously supportive in all instances; we didn’t have to battle with our boards over deciding to sell the company. Although the VCs were far more aggressive in setting the asking price!

Yaacov Cohen takes you through his experience step by step as he negotiates a management buyout of his company. The obvious question in this situation is, “Where do  you get the funding?” In this case, the capital came from three sources: management’s pension funds, friends and family, and a bank loan – which represented 75% of the purchase price.

I’m not going to reiterate Cohen’s story, but it’s worth recapping the happy ending to what was a difficult multi-month process:

No matter how you slice it, an MBO will drastically change a company and how it does business. Among our employees, we see a new sense of shared ownership and shared responsibilities. No longer “just” employees, the staff is motivated to go many extra miles to get things done, because they have a stake in the results beyond their paycheck. We were able to attract new talent to the company. We were able to attract new talent to the company including a VP of AI and an experienced GM for our North American business. We also leveraged the MBO to attract industry leaders to our newly appointed board of directors, so even as an employee-owned company, we are receiving top-notch guidance from an independent board.

Even the customers have been affected for the better:

Our customers have been impressed, too. Because the people they are working with are now owners, customers feel they are getting better service and results from their relationship with the company.

One of the sayings I use in my mentoring is “He or she who has most options wins.” Yaacov Cohen’s story proves that the third option for a company looking for an exit – buying out the investors – is not simply theoretical, it can and has been done successfully.


The most important perq you can provide – and it’s free!


Bill Gates was recently quoted about the best perquisite you can provide your employees:

The competition to hire the best will increase in the years ahead. Companies that give extra flexibility to their employees will have the edge in this area.

So what exactly does he mean by flexibility? For one thing, where the employee or team member works. That doesn’t mean if they aren’t at the office they are at home. Staff should be able to work anywhere they can get a [secure] internet connection. That could be office, home, or the local coffee shop. Of course, the other parameter is when. Developers are notorious for wanting to work at night. Do you know why? They have learned that there are far less interruptions. Programming requires intense concentration and interruptions for meetings and other corporate overhead cut down on productivity. Conversely you HR staff should be available in person for the full work week, or at least enough of it so the HR department always is available. So you need to be careful about the when.  The best way to go is to poll you staff about what split between in-office and out-of-office time works best for them. Then come up with some guidelines, not policies! Policies are for bureaucracies, guidelines are for fast and flexible companies.

And there is far more to work time flexibility than the work week. Your venture should have guidelines for major HR contingencies: illness, maternity, death in the family, etc.  But keep these guidelines simple and easy to understand. The fewer, the better.

The best process is to define when people are needed in the office, such as for all-hands meetings or for their departmental meetings. Best to push this decision making down in the organization rather than having come from the top of the organization. Those closest to the issue are best equipped to handle it.

So what’s in it for the firm in providing flex time?  A lot according to the The Deloitte Global Millennial Survey 2019 a lot! I don’t ordinarily quote at length from articles, but in this case I can’t add much to this important list:

1. Longevity.

Millennials and Gen Z may stay in a job for more than five years if their employers are flexible about where and when they work.

2. Job satisfaction.

According to a recent Staples study, a massive 90 percent of workers indicated that more flexible work arrangements will boost morale and increase their satisfaction at work–a key component of employee recruitment and retention.

3. Companies save money.

It’s a simple equation: Healthier employees lead to more engaged and productive employees. Lost productivity due to poor health costs U.S. businesses nearly $226 billion per year. Companies also pay less in health coverage for healthier employees.

4. Improve employee retention.

Companies with no flexible working policies in place are losing valuable talent. Per the Staples study, 67 percent of employees would consider leaving their jobs if work arrangements become too fixed.

5. Recruit better talent.

Flexible working will also improve your recruitment metrics. A 2018 Zenefits survey found 77 percent of employees list flexible work as a top perk when evaluating job opportunities.

6. Employees are more productive.

People who have some control over their schedules are more productive, plain and simple. Ron Friedman, award-winning social psychologist and author of The Best Place to Work: The Art and Science of Creating an Extraordinary Workplacesaid in an interview, “We have decades of studies showing that people are happier, healthier, and more productive when they feel autonomous.” Friedman explains that autonomy is a basic psychological need so that “the more autonomous we feel, the more likely we are to be engaged.”

So yes, salary, stock options, and bonuses are very important in attracting and retaining talent. But in my experience staff soon get used to their salary and unless there is some intervening event, like a new hire who comes in at a salary above them – and people do talk abut their salaries, whether you like it or not – they get acclimated to their compensation. (Though bonuses are a good way to break through this normalization of compensation, but that’s a topic for another post.)

Providing flexible scheduling costs a company little or nothing, (although leave has to be accounted for) especially compared to salary and other benefits, such as health insurance. The ROI on providing flex time is huge!

Go easy on the foosball tables and free food and heavy on the flex time and you will save money and have a more engaged and satisfied work force. Successful companies need to evolve and adapt,;flexibility is a critical element in adaptation. Only the fittest survive!

What’s the average age of the successful entrepreneur?

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The media has done an excellent job of promulgating the myth of the whiz kid entrepreneur, likely galvanized by Mark Zuckerberg and the monumental success of Facebook. The typical Silicon Valley success story leads with the Stanford student, or better yet, a Stanford drop out, who raises millions of dollars to build a world changing company.

And from where I sit, mentoring students and recent alumni of MIT, the myth certainly seems true. Even the alumni skew to being less than 30 years of age. I’ve yet to see a faculty member and I think perhaps only one or two staff have appeared in my ventures to be mentored queue.

Of course, I’ve seen studies showing that startup founders tend to be far older than the Mark Zuckerbergs of Silicon Valley fame, but I largely dismissed those studies as they included founders of small, no-growth businesses like pizza shops and dry cleaners, not the fast growth startups I’m used to working with. These studies showed that owners of small businesses tended to be in their late 30 and 40s.

However, new research by the economists Pierre Azoulay of M.I.T., Ben Jones of Northwestern, J. Daniel Kim of the University of Pennsylvania and Javier Miranda of the United States Census Bureau, provides the first systematic calculation of the ages of the founders of high-growth start-ups in the United States.

This research is highlighted in The New York Times article Founders of Successful Tech Companies Are Mostly Middle-Aged by Seema Jayachandran.

After stripping identifying information, the government provided the researchers with a data set including 2.7 million business founders. The researchers calculated that the founders’ average age was 42. And for the founders of the 0.1 percent fastest-growing firms, the average age was 45. Firms that were successful enough to have an initial public offering or be acquired by a larger company showed the same pattern: Their founders were generally middle-aged.

The bulk of the article focuses on Tony Fadell, founder of Nest Labs, father of the iPod and key player in the development of Apple’s iPhone. His story is well worth reading about. But unfortunately the author misses a key point about entrepreneurs and why their age averages out to 42 years: I wager that a large number of successful entrepreneurs are serial entrepreneurs. Serial entrepreneurs often try, but fail at their first or even second startups. But they perform the number one job of the founder: to learn. And they apply that learning to their following startups and thus avoid many of the mistakes first time founders make. It is unfortunate that the census data the study relied upon did not provide data on how many businesses these founders started or co-founded.

Back in the last century the received wisdom amongst VCs was to be leery of funding founders who had already tasted success. They reasoned that successful entrepreneurs would lose that lean and hungry drive so necessary to building something from nothing. Now, three decades later, venture capitalists learned what Hollywood knew years ago: better to back a director who made one film that flopped that someone with no directing experience whatsoever. I’d venture to say that there is now a positive bias in favor of serial entrepreneurs, successful or not. In fact many VC firms have “entrepreneur in residence” programs to bring their successful founders in house in the hopes that they will help the venture firm spot winners or even start a new company, to be backed, of course, by the hosting VC firm.

So what’s the lesson in this new study for founders? If you are young you can leverage the bias in favor of youth: risk-taking mindset, raw problem solving capability and pure energy. And if you are headed towards middle-age, or even there already, you should position yourself as older but wiser, with great examples of how you have learned from experience. Either way, founders are the product – the best investors put their money on great founders, not great ideas. Great ideas are cheap, not so great founders. Finally diversity  wins when it comes to teams. So if you are a recent graduate make sure your co-founders have experience working in startups and in tech companies. And if you graduated some time ago, then play up your experience and look for younger teammates. As I say to my mentees, marketing is 90% positioning. As a founder you are marketing and selling yourself constantly: to investors, employees, partners, the media, vendors and others. Play to your strengths and build a team that can cover for your weaknesses.

What people don’t get about Apple

Apple-1To the casual consumer Apple stands for high prices and their walled garden strategy or the Apple ecosystem. To those more sophisticated, Apple stands for the primacy of design.

But neither is correct, what sets Apple apart and has from Day One, thanks to Steve Jobs, is their relentless focus on the consumer experience.  That experience starts with elegant, cool advertising and leading edge retail stores.  When computer retail stores were dying Jobs launched Apple stores, which were widely derided by the cognoscenti at the time, but have gone on to be the leading retailer in the world as judged by the retailing metric of revenue per square foot. Rather than a typical retailer’s transactional focus, Apple stores focused on the customer store experience, inviting people in to see, touch, play with, and learn about its products in a comfortable, aesthetically pleasing place.

Once you buy an Apple product you will see the Steve Jobs’ touch in the packaging – every element of the package reflects the Apple ethos of clean and elegant design. Unboxing videos of Apple products have become a thing on YouTube, now emulated by fans of dozens of other products.

While other hardware companies touted specs – what we used to call speeds and feeds – Apple has always offered extreme ease of use and a very shallow learning curve for its products. Features and performance won’t be taken advantage of if you first present the customer with a clunky, hard to use interface. People who used to bill themselves as user interface(UI) designers now have gone up the value chain to become user experience (UX) designers. Apple’s influence has created an entirely new profession!

As Tony Fadell, father of the iPod and very close relative of the iPhone said, “At Apple Steve Jobs showed him how to go beyond designing a product; the key is to design the customer’s whole experience, from packaging to messaging.” Apple’s recent focus on services from Apple Music to iPay to their new credit care extends the customer experience beyond hardware and software to provide a seamless mesh of services to deliver the simple and elegant Apple experience post-product purchase.

Solving a problem for your customer is necessary, but not sufficient. Designing a clear and simple UI is also necessary, but not sufficient. What founders must do is to design their customer’s experience from marketing communications to product first use to tightly integrated services that add value to the product. It’s far too easy for founders to think they are on their way once they find a solution to a customer problem. But your journey has just started! You need to think through every element of the customer’s experience from marketing to using the product to solve a problem to upgrading to the latest software and services on offer and polish every elements of that experience so it shines brightly.