Archive for August, 2007

A few thoughts

August 1, 2007

Watch your backside. Your ass is perishable. Remember that.

If you think there MIGHT be an afterlife, you might as well act like there IS an afterlife.

Life is always in play. There is no pause button. I meditate a lot and you should to. Meanwhile your life is in play.

There are no free lunches. If you got one, somebody paid for it.

You reach a certain age and you realize the world really does change before your eyes.

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On intuition

August 1, 2007

You either know or you don’t know. If you don’t know and pretend you do, you’re dead. Not knowing is fine. Pretending is suicide. Now, not everyone needs to know you don’t know. That’s not pretending. Acting and pretending are different. You pretend when you’re five. You act when you’re an adult. If you want to pretend, write fairly tales. Writing fairy tales won’t kill you.

Just when you thought…

August 1, 2007

What do you do when you don’t have an ace in the hole. You have to have an ace in the hole. You know that. But what if you don’t. what then? What happens when you need to have an ace in the hole and you don’t have one. What happens when you need a break and you’re not going to get one. And you already know it. What happens when there is no luck to be had. Rise. Rise above it. Grab another deck. There’s four aces in it. No more decks? I doubt it.

Instinct

August 1, 2007

Nobody’s watching. Nobody knows. What do you do. You sit and think. You are deciding. Or have you decided. Are you just waiting. Are you just finishing your thinking so you will do what you’re going to do. Because you will anyway. So why are you thinking. Are you waiting for something to happen that might change what you’re going to do. Probably waiting for something that’s not going to happen to happen to keep you from doing what you’re going to do, even if you haven’t decided. Because you’ve already decided. And you already know.

Dancing Blind

August 1, 2007

What is this feeling
What is this combination of weakness and stimulation. What is this stirring. Frozen stirring.
What is power of unconscious. Where does it come from. Why does it exist. Heightened awareness. Heightened emotion. Fear or something like it.

Thoughts on sweat equity

August 1, 2007

Below is a summary of a question and responses I gave regarding sweat equity…

Question: I want to reward 3 grad students for their contributions made in advancing my startup company. I also would like to incentivize them to join the company and ensure they honor IP/NDA confidentiality. Do you have advice regarding offering a small, but not insignificant, equity stake that vests upon completing 1 year of employment as a reward and incentive?

Response:
First, equity in a startup is not liquid, meaning there is no market (and therefore no market value) for it. So, perception is the
key.

That said, I’m sure you’d get ten different answers to this question but here are some of my thoughts.

First, assume success. This will prevent you from overcompensating with equity. For example, if you project a $50 million exit, 1% of the company is a lot of money. Let’s assume someone does work that you think could be done for $25,000 at market rates and they do it for free. Based on the risk and time value of money, maybe their “exit” should be worth 5x by taking equity instead of cash. Therefore, their equity needs to be worth $125,000 at exit. At $50 million, that would be .25%. Based on the stage, your preferences, and the perspective of the person you’re compensating, that “5x” multiple may need to be higher or lower. The point is, try to think in terms of future value instead of percentages because to the person you’re paying, the percentages always sound low…after all, even 9% is a single digit number, while it would equate to $4.5 million in a $50 million exit.

Another thought is to determine which people are going to be core to your team long term. Those individuals should get better treatment. I would treat someone better if I want them around long term, even if the work they are doing now might not merit as much as the next guy. At the root here is motivation and commitment — and more shrewdly, golden handcuffs. Somebody with a healthy equity stake is going to stick with you through the natural ups and downs.

Another thought is to avoid compensating with equity on a “routine” basis as a substitute for cash. For example, if you hire someone on, then can’t pay them for four months, don’t try to translate the dollar value per month into equity. This can get problematic. I don’t recommend taking on a lot of deferred salary as debt either, but that’s another issue.

Another thought: As students, these folks should be flexible especially if you are “reserving a seat” for them once you have cash flow. Compensation is part of the relationship between the company and the individual and therefore the individual’s circumstances and preferences should be considered.

Another thought: your equity strategy is very dependent on whether you plan to take on outside investors. If your cap table gets out of whack before you have involved a qualified lead investor, you’re in for trouble.

Another thought: I would not offer equity to anyone other than a very trusted colleague without an attorney involved, and even then it would only be a very short term understanding. It’s just not good practice.

Another thought: many individuals have inflated expectations about payouts. This is exacerbated by media portrayals of big cash outs and often by entrepreneurs making big promises to the initial team. Depending on your approach, you don’t necessarily need to dampen “dream world” thinking, but ultimately you need to keep your key people on your side and letting them think their payout is going to be way more than realistic puts your relationships at risk.

Another thought: the way you structured your question makes me think these folks have already performed work and now you’re trying to give them some skin in the game for ongoing reasons. That’s great! The other way — where you get somebody amped up about equity up front so they will help you — is risky in my experience. Several times, I have offered substantial equity-only offers from which I got a lot of up front excitement and results, only to have both taper off very quickly when “distractions” got in the way.

Regarding your vesting schedule, a one-year cliff vest strategy is atypical for people you want as employees long term. Advisory board members or similar contributors often get this type of vesting. A 4-year vesting schedule makes more sense for an employee. If you are trying to accelerate vesting for work already completed, you can carve out a larger percentage to vest in the first year. You may also have other reasons for a shorter term. If so, think about layering in triggers that accelerate vesting as opposed to abandoning a more conventional 4-year vesting schedule.

Finally, specifically regarding IP, everyone should sign ownership agreements, including you, such that the company owns all IP. That’s regardless of any equity or confidentiality issues.