The VC post of the day is from Ben Horowitz (A16Z) and is titled Lead Bullets. Ben tells a story from his time at Netscape when he discovered Microsoft’s IIS was about to ship, was 5x faster than the Netscape Server product, and was free. He went searching for a bunch of silver bullets to solve the competitive issue (e.g. different market segment, acquire someone, scale back and re-segment the product). Ultimately, the solution was simply to use lead bullets – make the Netscape Server product better than the IIS product. Sure – they still addressed the other things but if they hadn’t taken on the product issues and made a superior product, the rest probably wouldn’t have mattered much.

Ben ends with a strong call to action for any entrepreneur:

There comes a time in every company’s life where it must fight for its life. If you find yourself running when you should be fighting, you need to ask yourself: “If our company isn’t good enough to win, then do we need to exist at all?”

David Skok (Matrix) has today’s great post up titled Multi-axis Pricing: a key tool for increasing SaaS revenue. If your business uses a subscription pricing model, this is a must read post. While David positions it as SaaS related post, it applies to any subscription model, including consumer and add-ons to hardware products.

It’s Monday and our friendly neighborhood VCs stored up their posts over the weekend and launched a few with a vengeance. Today, we have three great ones.

Roger Ehrenberg (IA) writes about mentors in his post Mentors: an essential engine for growth. While he wrote it on Saturday, it’s still applicable on Monday.

Fred Wilson (USV) has his normal MBA Mondays series with a guest post from Andy Sack titled Revenue Based Financing. It’s an advertorial for Andy’s firm Lighter Capital but is a really good explanation of how revenue based financing works.

Charlie O’Donnell (First Round Capital) wraps up our posts of the day with a dynamite one titled 10 Misperceptions About Venture Capital.

I love this post from Bryce Roberts (OATV) titled You’re Doing It All Wrong.

Every great company I’ve ever worked with has its own style, personality, approach, strengths, weaknesses, and quirks. Experience – and inexperience – when combined with an amazing new opportunity, creates really unique characteristics that – over time – mix with other company DNA to create new characteristics. Funny – just like humans.

This is going to be fun. Rob Go (NextView) is taking on “Startup Jargon” with a new series. His first post is about Disruption, a word I never manage to type correctly the first time (I always type it as distruption.)

Many moons ago Fred Wilson wrote a great blog series on VC Cliches. It’s timeless. Let’s hope Rob lives up to Fred’s standard with the Startup Jargon series. Go Rob Go (sorry – couldn’t help myself on that one.)

We’ve got Fred Wilson blogging the incredible MBA Mondays series. I (Brad Feld) have started a Finance Friday series. And now Fred’s partner Albert Wenger has started a Tech Tuesday series.

Albert is a hard core developer turned VC. He’s started five companies, has an undergrad degree in Computer Science from Harvard and has a Ph.D. in Information Technology from MIT. Yes – he codes. His first post in the new series, Tech Tuesdays: Computing’s Building Blocks (Overview), is up.

Wednesday and Thursday are still available? Anyone out there ready to take them on?

The post of the day is from Scott Weiss (Andreesseen Horowitz) titled Looking Bigger.

Scott’s a new VC blogger – I’ve gotten to know him over the past few years on the Return Path board and he’s a dynamite thinker. He’s got amazingly useful experience (and stories) from his last company – IronPort – and this post is a good example of his insights which are backed up with real experience.

I expect to see Scott, as well as his partners Ben Horowitz, Marc Andreessen, John O’Farrell, and Jeff Jordan at A16Z who are all blogging, show up in the VC Post of the Day on a regular basis.

Well – I fell off that particular horse. That would be the “I’ll blog daily about the best VC blog post of the past 24 hours.” I could make some snarky comment about how there weren’t any for the last few weeks, but that wouldn’t be true. I just fell of the horse. But yesterday, when I was at an SVB event talking to a bunch of SVB people, a long time friend said “thanks so much for writing the VC Post of the Day – it saves me a ton of time looking through all the VC blog posts.” So I got back on the horse.

Today’s post of the day is from Nic Brisbourne (DFJ Esprit) and it titled What is anti-dilution/downround protection? Nic covers narrow-based, broad-based, and full ratchet anti-dilution with real examples using real math.

Note to self: that was easy – five minutes, done.

Question: How do VCs mitigate risk in their investment portfolios? Are VCs simply looking to diversify the type and stage of companies in which they invest, or do they employ other financial hedging strategies?

I’m not aware of VCs using classic financial hedging strategies. In many cases, they are prohibited from doing this by their LP agreements and/or investment documents in the companies when they make an investment. While I’m sure there are some folks that do this, I don’t believe it’s prevalent.

The primary ways VCs mitigate risk are (1) time diversification, (2) stage diversification, (3), sector diversification, (4) pro-rata or over pro-rata investing over time, and (5) number of investments in the portfolio.

1. Time diversification: Most VC funds are committed over a three to five year period. The commitment period for most funds is five years – by spreading out the commitments over a three to five year period, a fund gets time diversity and theoretically smooths out some of the macro cycles. Most VCs who have been investing since the mid-1990′s understand this well as many funds raised in 1999 and 2000 were fully committed in one year. As a result, the funds were invested during the rapid rise and peak of the Internet bubble, resulting in horrible performance for 1999 vintage funds due to their lack of time diversity. The firms that committed their 1999 over a three year period vs. a one year period ended up making a number of investments as the bubble burst, including many that ultimately ended up being successful.

2. Stage diversification: Some funds have an early stage and late stage investing approach. The VC industry went through a phase post 2000 where there was a shift in some early stage firms to mid and later stage investing as well as a phase in the late 1990′s where early stage firms created growth funds to augment their early stage strategy. Today most of the firms that did this have settled on an integrated early / late stage approach within a single fund. Recently, many larger firms who had drifted away from seed stage investing have created new seed programs.

3. Sector diversification: Historically, a number of VC firms had broad sector diversification, investing in software and life sciences companies out of the same fund. With the rise of clean tech investing in the mid-2000′s, many software oriented VC firms started clean tech practices. This ebbs and flows.

4. Pro-rata or greater: Most firms reserve the right to invest their “pro-rata” ownership in future rounds, allowing them to keep their percentage ownership in the company. This is both a downside and upside strategy. More recently, some firms have started aggressively buying additional ownership in their winning companies.

5. Number of investments in the portfolio: There is conventional wisdom that each fund should have 25 – 30 companies (or “names”) in each fund. Recently, some firms have taken a more extreme approach with upwards of 50 or more companies in each fund. Regardless, if you are playing for big wins, making sure you have enough investments in each fund is important.

There are other diversification approaches like geography (e.g. investing in the US, China, and Israel), but these tend to be limited to a few very large firms.

Question: I am a startup about to receive a convertible loan investment. My friend has been advising me on an adhoc basis re. the financials on a barter basis with me. Now he’d like to formalise his agreement with the company. He has made his money as an entrepreneur and now travels alot but will be available for consultancy for us. His deal feels harsh: 1) he’d like to consult for 2 days a month at £1,000 per day. He travels alot so, this would be around his availability etc etc 2) he’d like to be paid not in cash (we can’t do this) but ‘via warrants’ priced at the same price and on the same terms as the deal done with our first round financier. He has stated that any entitlement to warrants earned cannot be revoked upon any subsequent termination of the contract by me. 3) He’d like to be a ‘commercial manager’ with a lot of involvement in the business exchanges with other professionals (something I’ve done to date) but I feel it’s too heavy-handed at this very early stage of the business. Please could you explain what ‘warrants’ mean?

Valuing his work in the first 12 months at £24,000 (2 days per months @£1,000 per day) at the same as our financier would mean he’d get approximately 5% of the company. This seems high for us. I wonder do you have any thoughts on an alternative proposition? We have raised investment for the first 7 months of business. And we’ll have to raise more immediately. To date, my friend hasn’t made any introductions here and doesn’t intend to. He sees himself more as a ‘safe pair of hands’ for investors with his background in finance. What would be a better deal to expect from a professional with this sort of experience to bring to the company?

Your friend is essentially asking for the right to invest at the same price (known as the “exercise price”) that your financier is investing in. The amount of warrants he is asking for is mathematically linked to the amount of time that he’s working based on his day rate.

While it’s a strange ask, it’s not inappropriate. Another way to look at is that he’s asking for the right to invest £24,000 in your company on the same terms as your investor. So he’s not actually getting equity, just the right to buy it at a later date. The terms associated with this matter – if the time he has to exercise the warrants is long enough (say 10 years) then it’s likely he’ll never have to shell out the money to actually buy the stock. Instead, when the company is acquired (or goes public) he’ll get the difference between the share price at that time and the exercise price of the warrant.

It sounds like your post money valuation is around £500,000 (if £24,000 is about 5% of the company). Another approach would be to simply offer him warrants for a percentage of the company that feels good to you for his contribution. If you feel 2% is adequate, rather than him earn the equity monthly, just make him a grant of 2% in warrants on the same terms but vest them monthly over a year.