Author Archives: Zach Shulman

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May 11, 2012

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Public Service Announcements

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StartFast is OPEN

Upstate NY has an accelerator……really…..and its first day of operation is Monday, May 14th!  I realize that there are many accelerators around the country (many, many, many), but the accelerator craze has pretty much left Upstate NY alone.  Until now.   And it is fantastic that StartFast, based in Syracuse, is here!  A bunch of individuals and Cayuga Venture Fund have backed StartFast – the community coming together to support an important endeavor.

A special call out and thanks to Nasir Ali, Chuck Storman and Martin Babinec for getting StartFast started and running it.  3 guys really making an big impact!

Here is a list of the first class of companies:

StartFast Class of 2012

  • Mozzo Analytics(Syracuse, NY and Philadelphia, PA) MozzoLinks extracts all the links from your gmail. In one glance, you will see an organized summary of your links, searchable by people, topics, and time. All your links, right at your fingertips. (http://mozzoanalytics.com)
  • PadProof(Orlando, FL and NYC) The photos you want, in the palm of your hand. A proofing app for the moments that matter, built to go anywhere you go. Preview, share, and purchase your photos from your photographer with the swipe of a finger. (http://padproof.com)
  • BitePal(Ithaca, NY) BitePal makes getting a restaurant discount fast and easy. No payments, printing, or registration necessary. You simply choose one of the deals we offer, provide your cell phone number so we can send you a confirmation message, and then show this message to the waiter at your table once you are done eating. (http://bitepal.com)
  • Cayo-Tech(Tel Mond, Israel) ‘Guard My Angel’ is a mobile application that watches over you without compromising your privacy. Whether you are walking alone in a dark alley, getting on a cab, or anytime you feel you need someone at your side, in the case of an emergency, we will notify your family and friends with the information they need to help you. (http://guardmyangel.com)
  • RevoPT (Ithaca, NY) Web and mobile applications to make physical therapy more personalized and more effective. RevoPT brings a simple, personalized, and interactive home exercise program that keeps patients accountable and increases the efficiency and effectiveness of rehabilitation. (Website under development)
  • Tivity(NYC) A social network for people looking to find, schedule, and share active lifestyle activities with people around them. (http://tivity.us)
  • Streamspec(Syracuse, NY and NYC) a next generation, image based Internet advertising company. (www.streamspec.com)
  • CanVita(Denver, CO and NYC) The visual and evolving CV for the era of the social web, Canvita showcases your evolution and best work in a fun and intuitive way.  (http://canvita.com)
  • YouGift(NYC) A celebration platform for gifting anything, combining greetings and gift cards sent via social platforms like Facebook, Twitter, Pinterest, etc. (http://yougift.com)
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May 5, 2012

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Dealing with VCs, Startup Life

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Hard to Say “No”

It is no secret that many VCs have a hard time saying “no”.  They string out their “look”, ask many many many questions even after interest has waned, etc.  I try very hard not to fall into that trap.

My partner at CVF sent me this hilarious video the other day.  I offer it up to anyone needing to say “no” to a business idea or company.  I am still laughing…..enjoy your weekend.  And most importantly, use it!

Here it is.

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April 26, 2012

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Board of Directors, Dealing with VCs, Management, Startup Life

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When to Bring Up Valuation

If you want to scare off VCs, start your pitch with “we are looking to raise $X at a pre-money valuation of $Y”.   Stating how much you want to raise is fine and recommended.  In fact, even better to state how much you want to raise and how long that amount will last.

However, stating a desired pre-money valuation early in the process is not a good idea.  Here is why.  There are typically just a handful of pivotal terms in a VC deal and they fall into 2 categories:  control terms (like special voting rights for the Preferred Stock and board seats) and economic rights (like liquidation preferences, anti-dilution protection, whether the preferred shares are participating or not, and………pre-money valuation).

In my view, starting off a VC relationship by diving into perhaps the most critical economic term is kind of like, well, moving too fast on a first date.  The good discussion will happen, but give the relationship a while to mature first.  Seriously, pre-money valuation is a function of many things (team strength, size of market, IP, hotness of sector, etc.) that will not all be readily apparent at the beginning.

So, my suggestion is to not bring up pre-money valuation unless (i) asked by the VC or (ii) the relationship has matured to a point where you can sense that a term sheet is likely.  If a VC asks for your input early on in the process about pre-money valuation, be skeptical and careful in your response.  If you give an actual number and it is too high, you have just given that VC a reason to say no (as in “why do I want to deal with an entrepreneur whose expectations are out of whack with my reality”).  Instead, I suggest something like this:  “We expect a valuation commensurate with our state of product readiness and company maturity.  We look forward to discussing that in more detail when your interest level merits”.

Answers to the question that I think are likely unproductive (again, I am talking about early discussions when you are building the relationship), include:   “$6.5mm is expected to buy 25% of the company”.   That is saying exactly what the expected pre-money valuation is.   Or, “Our post-money of our Series A was $10mm”.   No question that a pre-money for the Series B might be above $10mm, but it all depends on a bunch of factors that need time to flesh out.

Bottom line:  valuation discussions too early in the VC relationship game are a huge distraction and will likely backfire on you.   The exception is when you have a ton of interest (the VCs are just crawling over you).  That demand will accelerate the relationship building and the valuation discussion.

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April 18, 2012

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Dealing with VCs, Management, Startup Life

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The Twitter “Patent Hack”

Every once in a while I read a post that just cries out “re-post”.  Today, Fred Wilson wrote about the Twitter “Patent Hack”.  The post is not extraordinary.  Twitter is extraordinary for its actions.

In a nut shell, when an employee works for a company, that employee signs an assignment of inventions agreement.  This means that inventions that the employee creates on the job are owned by the company.  I hope that you see this as an obvious necessity.  The company is paying the employee to create and the company needs those creations to function and operate.

Twitter has its employees sign assignment agreements (really, every employer has its employees sign them assuming they have good legal input).  BUT, what Twitter has done is to tweak its assignment form to say that it will only use the inventions so assigned for defensive purposes in the event it is later sued for patent infringement.  So, it will use inventions, particularly those that get embodied in a software-based patent, to defend against an infringement claim.

Importantly, Twitter will not use any such inventions (again, think patents) to offensively go after a competitor that might be infringing.  Twitter does not want to stymie innovation by its competitors in the software space.  And, even further, would require any buyer of the Twitter patents (for example, a buyer of Twitter in an acquisition) to get the original inventor’s (i.e., the Twitter employee who originally assigned the invention to Twitter) consent to use the patents offensively.

This is really interesting.  Plain and simple, Twitter is trying to start to de-claw patent trolls in the software patent realm.   I like what they are doing as it applies to software patents.  Truly innovative!

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April 10, 2012

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Miscellaneous

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No Mess (Hanging Deferred Comp – Part 2)

I earlier wrote a post on hanging deferred compensation.  You can view it here.  The overall theme is that deferred compensation is messy and very difficult to get paid once you get VC funding.  The VCs view deferred compensation that has accrued prior to their investment as “not my problem” and will generally not want their investment dollars being used to pay it. Rather, they want their investment dollars used for growing and operating the portfolio company going forward.   To me this makes perfect sense and is justified.  To put it bluntly, why should a founder, who knows that he/she will have little salary when they start their startup accrue the “lost” salary on the company’s books?  It is part of the startup routine, prior to fund raising, to bootstrap and be super frugal.  Enough said.

There is one solution to hanging deferred compensation (other than having it evaporate) that can work, however.  Let’s suppose that Joe and Mary are the founders of Startup Z.  They have raised some money from 12 friends and family (let’s assume the friends and family have purchased common stock).  Mary and Joe own 60% of the company and the friend and family own 40%.

Because Joe and Mary received barely any salary for the past year, the financial statements of Startup Z show $50,000 of accrued salary for each of them.  They are out raising a round of VC dollars and the topic of the accrued salary comes up in due diligence.  Always a pleasant discussion (kind of like talking about adult chicken pox, which I had when I was 41 — that was a terrible experience).

Faced with the issue, the VC could give Mary and Joe an alternative to having the deferred compensation vanish.  Alternatively, the VC could say “Joe/Mary, you all deserve recognition for your efforts over the past year and that recognition should come from your current shareholders for whom you have worked hard with little pay.  So, talk to them about adjusting the cap table prior to our investment – have the board grant you stock options (to avoid a tax issue) prior to our investment to compensate you for the deferred comp.”

The impact of such a stock option grant to the VC is zero because it would be done pre-money and simply factor into the pre-money valuation and share price calculation.  You would call this solution part of “cap table clean up”, a topic I just realized I should write about soon.  After the stock option grant, Mary/Joe might own 65% of the pre-money cap table.  Startup Z can use the VC’s term sheet pre-money valuation to figure out the right amount of options to grant to Mary/Joe to compensate them for the $100,000 in total.

Hope you all had a great holiday weekend.