Author Archives: Zach Shulman

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April 20, 2011

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

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3 Up / 3 Down

I was talking with one of the CEOs that we work with the other day about the “weekly update”.  See https://ithacavc.wordpress.com/2011/02/28/the-weekly-update/.  This post presents a variant to it.  Don’t get me wrong, I still love to get weekly updates and still love the purposes they serve.  The critical purpose on top of my mind this morning is “unity”, as in getting the entire team unified on an ongoing basis.  The team is not just the board, but the whole management team as well.  I encourage CEOs to send their weekly updates to their management teams (sometimes editing is necessary, but not often).  The “unity” purpose falls under “amazing communication tool” that I wrote about in my earlier post.

3 Up / 3 Down is a variant of the weekly update (perhaps call it the little sibling – not quite as mature as big brother or sister).  In total it might be 6 sentences (yes, even a recovering lawyer like me can do that math).  On Sunday night, as a way to start off the week with a unifying message to the team, I am suggesting that CEOs (or other person in charge of the update though typically it is the CEO) who have been unable to write a full one page update (and the best updates are not longer than one page IMO), simply write down the 3 things that make them feel up and the 3 things that make them feel down…….and then press “send”.   Obviously the points should relate to the business.  And my guess is that this should take between 5 and 10 minutes max.  Once sent, the board of directors will know what is on the CEO’s mind, the management team will know as well and the CEO will be building unity (among other things).

Now that I have suggested this, I am going to start doing it by sending my 3 Up/3 Down to my venture fund partners.

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April 17, 2011

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Public Service Announcements

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Do the Right Thing

This past Thursday and Friday was the Entrepreneurship@Cornell Celebration (see http://entrepreneurship.cornell.edu/activities/celebration/2011).  It was a fabulous event.  During the Celebration, the 2011 Cornell Entrepreneur of the Year was honored.  Harris Rosen was the honoree (see http://www.news.cornell.edu/stories/Jan11/CEY2011.html).  Mr. Rosen’s life story is truly one of the most inspirational tales I have ever heard.  He summed it up with “Do the Right Thing”.

Before I try to tell you Rosen’s story in blog fashion, the saying “Do the Right Thing” has infiltrated my house before though in a different context.  I use it with my kids (ages 5 and 9) when trying to get them to treat each other nicely.  For example, if the 9 year old has some candy and the 5 year old asks for some, the 9 year has a choice:  don’t share or “Do the Right Thing”.  If she does the right thing, she now knows the benefits.  If she does not, then I usually find some other way or rewarding the 5 year old for his sister’s not stepping up and doing the right thing.   Life lesson turned into a family dynamic game.

So, back to Rosen.  He grew up in the slums of NYC during WW II.  Very poor and his parents never graduated from high school.  One day when he was about 9 or 10, Rosen and his brother were playing in the street when a tour bus stopped.  Looking at the Rosen boys, one well-to-do lady said to her friend, “so, that is how they live.”  Rosen went home and asked his mom what the lady’s words meant, and she explained.  She further explained that the only way out of the slum was education.  From that point on, Rosen and his brother took school seriously.  Both graduated from high school and Harris was accepted into Cornell (in the School of Hotel Administration).  After college, he worked a few jobs, served some military time and eventually ended up at Disney.  In 1974 he was fired from Disney for challenging his bosses and that year purchased his first hotel (a Quality Inn) in Florida.

I am leaving some details out.   He built his hotel properties to multiple resorts with over 6,000 beds.  He has never levered a property and so has a competitive advantage during economic down cycles.  In the early 1990s, Rosen had an epiphany, and realized that it was time to start giving back.  Note that by this time he had already started to provide all his employees (over 2,000) with full health care coverage (I believe completely self insured) with a maximum out of pocket expense for any employee of $1,000 ($500 for each of the 2 first years).  Rosen’s hotels have incredibly low employee turn over.  I should mention that he does not allow any of his employees to smoke.  Drug tests are used to detect nicotine, and any offender is given 6 months of treatment (employee’s choice of treatment) to quit.  Rosen has only lost 2 employees to the no smoking rule.

The epiphany materialized itself by Rosen “adopting” a section of Orlando, FL called Tangelo Park in the early 1990s.  TP was a run down, drug infested section of town.  Rosen literally went to the town governing body and offered free day care for all kids prior to kindergarten and then free tuition at any Florida state college for anyone from Tangelo Park graduating from high school.   Since then, the high school graduation rate for Tangelo Park has gone to 100%.   No, that is not a typo.

This is Mr. Rosen’s way of, to use his words, “Doing the Right Thing”.   His message was simple:  the more you have the more you need to give back.

Mr. Rosen told his story via a moderated discussion with a former Cornell president on Thursday afternoon.  The audience of about 600 was completely enraptured.  There were inspired tears and huge ovations.  It was truly awesome to hear his story first hand.  Rosen is so humble that he is actually very uncomfortable in front of large audiences.  This made the presentation even more heart felt.

Do the Right Thing.

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April 12, 2011

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Startup Life

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Interview Questions, Part II

This week is the Entrepreneurship@Cornell Celebration (April 14th and 15th).  See http://entrepreneurship.cornell.edu/activities/celebration/2011 for more information.  I am one of the primary planners for this event so my blogging time this week is running on empty.

Remember that I asked for your favorite interview questions on the April 6th Interview Questions post.  A few responses came in to augment the list. Here they are (verbatim):

1.   What is the most humbling job you’ve had?

2.   What is in refrigerator right now?

3.   If you could be an fruit, what would you be and why? (seems silly but you actually get fantastically interesting answers and explanations)

4.   Sell me this (pointing to anything in the room – a pencil, light fixture, etc.) – shows how the person thinks on their feet, how well they understand what’s in front of them (much less the actual product/service), and how well they can communicate the benefits to others.

I like the commentary on #3 and #4.  I am still trying to figure out #2!

In class the other night at Cornell, I had a guest lecturer in talking about priority management.  Two additional questions came out of that lecture, namely:

1.   Can I see your current task list?  I love this question.  I keep a running task list on a legal pad (one pad lasts about a year), so I have a real affinity for task lists that get used constantly.  It says a lot about the person and obviously their organizational skill set and compulsive tendencies.

2.  Can I look inside your purse?  Of course this only works if the applicant has a purse, but an organized purse is a sign of some obvious traits that can be really beneficial in the work place.  I was warned that this “purse” question might cause some HR problems…..

Have a great week.

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April 6, 2011

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Dealing with VCs, Startup Life

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Creative Common Stock

I am a huge fan of simple cap tables.  A cap table is a written record (in Excel, for example) of who owns stock in your company.  It lists every owner out by amount owned, type of stock (common or preferred), and date purchased.  It also lists out option holders and warrant holders.  It should also provide a combined summary so that it is easy to see who owns what % of the company on a fully diluted and converted basis.

One rule of simple cap tables is to issue “normal” stock to founders (common stock only) and investors (typically preferred stock, but sometimes common stock to early friends and family).  Additionally, at the seed stage, investors and the company might want to issue the investors convertible debt to avoid the question of valuation.  For clarity, it is impossible to issue stock without putting a value on the company.  There are no exceptions to this rule.  With convertible debt, however, you can raise money via a debt instrument that later converts to equity typically at a discount to the next qualifying equity round price.  So, again, with convertible debt, you delay the valuation decision altogether until the next equity round is raised (and hopefully by then the company is more mature leading to better metrics for valuation).

Yesterday I spoke with a faculty member at Cornell about structuring an investment.  A real institutional investor wants to invest $XX,000 in his company.  I stress that the offer is from a real investor with a good reputation.  The company is at the pre-seed stage, and the outside investment would qualify the company for an additional grant from a government source (matching funds).  Seems like a win-win.  The investment is a small one and, to me, the investor is basically buying a ticket to watch the company and participate in future financings if desirable.

The investor suggested to the faculty member that the investment be convertible debt.  This suggestion was completely appropriate as doing a Series A round for only $XX,000 would gum up the company’s cap table (thereby violating the simple cap table rule).  When the company raises its first meaningful equity round (in terms of dollar amount), it will not want to have any existing preferred stock on its cap table.

The wrinkle is that, in this case, a convertible debt investment will not qualify for the government match because it is not equity.  So, we needed a solution.  The investor deserves to get preferred stock ultimately (remember, that was the goal of the convertible debt).  Understanding that convertible debt would not work for the company, the investor proposed a fair valuation for the investment (in other words, the investor proposed that the $XX,000 would purchase Y% of the company).  The only concern is how to issue common stock to the investor and still make it feel like an institutional investor.

After discussion, the faculty member and I concluded that issuing common stock with the contractual right (by written agreement) to convert the common stock to preferred stock in the next equity round would work.  I hope the investor agrees.  The conversion ratio would have to be worked out (it could be one for one or, more likley, will be based on simple formula comparing the share prices of each round), but it seems like a good solution.  Critically, it keeps the company’s cap table simple and positions the company well, from a cap table perspective, to eventually raise a “first” preferred stock round when it is ready.

I am curious to see how it works out.

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April 2, 2011

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Management, Startup Life

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Interview Questions

Coming up with good interview questions is an art, particularly when you are interviewing people for executive positions.  I have a list of questions that I like to augment from time to time.  Some questions are quirky, some are predictable, and some are a little weird.  Purposely weird.  My general theme is to test how the candidate will react in a startup environment and deal with/treat people (including board members) in that environment.  After all, leading a startup takes an organizational behavior skill set.  Here is a sampling (in no particular order):

  • If given the choice, do you sit in the exit row on an airplane?
  • Do you accept phone calls from “restricted” numbers?
  • Do you keep your own calendar?
  • How fast do you normally drive in a 65mph zone?
  • When is the last time you actually created a PowerPoint?
  • How many unread messages do you typically have in your inbox at 5pm?
  • What is the last book you read?
  • What blogs do you read?
  • Do you know what DealBook is?
  • What do you value more:  product launches or business development?

I realize that some of these questions are practically silly, but I honestly think that keeping your own calendar is a signal of possessing important startup survival instincts.   Likewise, driving the speed limit is a sign of caution; driving 20 miles over a sign of recklessness; and driving, say, 75mph is aggressive bliss.   I could give a similar ditty about each of these questions.

If you like, put your favorite questions in the comments and I will assemble a list and post it up.

Been a crazy week, complete with a 5.5 hour board meeting (that was actually awesome).  Often times, board meetings over 3 hours signal some unpleasant issues.  This week’s was a nice exception.

Enjoy the weekend.