Archive for the ‘General QandA’ Category

Who Are Stock Certificates Issued To and When?

Q: We are a Delaware C Corp registered as a Foreign Entity in Colorado our home state and we need to figure out the answers to the following questions with regards to stock certificates.
1. Who gets stock certificates issued and when?
             My assumptions are that cash investments DO get certificates, warrants DO NOT.
             Founders and Employees with vesting schedules DO NOT get certificates, until a portion of stock is vested.

2. Do the buy and print your own certificates follow the normal process?
3. Do private C Corps file capitalization stables with the SOS?

A (Jason):

It’s a pretty simple answer, really.  If you buy the stock, you get the certificates.  So cash investors do get certificates.  Warrants and options are securities that provide the holder to exercise them later by paying for the stock at a pre determined strike price.  At the time of exercise, money is paid by the holder to the company for the stock subject to that warrant or option and then a certificate is issued.  The options can not be exercised until vested, as you suggest.

i’m not sure what “buy and print” your own certificates mean, but there is no form that you have to follow.  It just needs to be signed by the President and Secretary of the company.  Furthermore, cap table are not filed anywhere.  You may keep this information private.

 

Ask the VC Live (Update) and Start Up Drinks

As previous posted, I’m presenting at the University of Colorado a 1.5 hour "crash course" lecture on the VC industry.

There are two updates:

1. The program is February 24th (not 25th, as originally posted) at 5:15 at the CU law school.  You can find more information here

2. Several folks are getting together and re-creating "Boulder Start-up Drinks" after my presentation.  This was a good event that I was sorry to see fade away, so I’m glad that it’s found new life. 

I am still working on getting the presentation recorded in some fashion, as there has been a fair deal of interest.

Ask the VC Live (Update) and Start Up Drinks

As previous posted, I’m presenting at the University of Colorado a 1.5 hour "crash course" lecture on the VC industry.

There are two updates:

1. The program is February 24th (not 25th, as originally posted) at 5:15 at the CU law school.  You can find more information here

2. Several folks are getting together and re-creating "Boulder Start-up Drinks" after my presentation.  This was a good event that I was sorry to see fade away, so I’m glad that it’s found new life. 

I am still working on getting the presentation recorded in some fashion, as there has been a fair deal of interest.

Ask The VC – Live

For those of you in the Boulder/Denver area, I’m giving a 1.5 hour "crash course" lecture on the VC industry. 

The program is February 24th at 5:15 at the CU law school.  You can find more information here

The topics will include everything from what makes VCs tick, who are our bosses, what are things that you can do to improve your chances of receiving funding and things that many VCs don’t want to talk about.  No question is off limits and I hope that it will be a very interactive forum.  Consider this to be a live version of Ask The VC. 

Hope to see you there.

Are Eyeballs Good Enough?

Q: In the era of "free" software, would a mobile software startup be committing short-sighted suicide by attempting to price their product at all? These days, it seems that "eyeballs" are considerably more valued than short-term monetization.  Facebook being a prime example:  they avg a mere $3.00 in gross revs per active user annually, but yet they hold a $15B valuation. Within the VC community, how much weight does the "build it now – figure out a way to monetize later" type model still hold? Are you seeing any trends of push-back against this model?

A: (Brad) There was a time not so long ago (1999) when it didn’t matter how much revenue you had, or how much money you made (or more likely – lost) – all that mattered was how many eyeballs you had (and how fast that number was growing.)  If I remember correctly, that cycle didn’t end too well.

While there are plenty of different things going on this time around, ultimately all businesses have to generate a profit (and positive cash flow) to be valuable.  But that’s the not the question you asked.

These days, it seems that "eyeballs" are considerably more valued than short-term monetization.  The key word in this statement is "short-term".  In the short-term, it’s important that you get enough critical mass behind your mobile app and this generally means users.  However, with the emergence of the iPhone App Store and the crazy disruption it and the iPhone are having on the mobile phone and software market, I’d assert that all bets are off right now on what the best "short-term" strategy is. 

For example, I’m aware of several very popular iPhone apps that are free; I’m also aware of several that generated significant revenue in the first week for their publishers. 

Ultimately, if Apple is successful, it will help establish a new market price points for mobile apps that will range from "free" to "something".  I don’t think anyone knows what that range is yet, but it’s not going to be "free" to "free".  And – as a result, you shouldn’t view pricing your app as "short-sighted suicide", unless of course you price your app too high (where – in many cases – the max price you can charge is nothing.) 

I’d be a lot more worried about having an app that no one cares about.

Why Isn’t There A Network or Hub Connecting Venture Capitalists With Startups?

One of the questions we get often is whether or not there is a central clearinghouse or hub (social network?) where VCs and entrepreneurs can connect.  The idea is that VCs would find good deals and entrepreneurs would find funding.  The answer is "no."  Lately, on top of the questions, I’ve gotten several business plans that seek to create such a network.  So why aren’t there any?  And if not, should there be?

I’ve always been pretty negative about the idea.  In general, I think there would be a natural adverse selection to those who would populate the network.  Here’s why:

1.  Great VCs already have more great deal flow than they can fund.  Therefore, they will not be interested in such a clearinghouse and will "opt out" from participating.  Also, keep in mind that there is always a higher hurdle to fund a deal that hasn’t been started by someone whom the VC doesn’t have some previous experience with.  If the best VCs opt out, then likely, so will the best entrepreneurs.

2.  Repeat entrepreneurs (who have had success in the past) already have a VC network.  They’ll likely opt out because they already know VCs from their prior successes.  In fact, most of these types of deals are done quietly without a lot of shopping around.  This assumes that the entrepreneur liked his/her VCs at his last company.  If not, it will still be very easy to find backers for a previously-successful team.  Successful founders are always hot properties. 

3.  First-time entrepreneurs who have executive-level experience are at most one degree separated from a VC network.  Even first-time folks who have been part of a successful startup probably got enough "air time" at board meetings to get to know the investor syndicate and thus have their own network.  If not, they can usually gain access through their former CEOs and other management executives. 

4.  It’s not really that hard to find VCs.  Unlike 10 years ago, there are many more VCs out there and many of us have our email address on our web site.  It’s not that hard to just email and ask!

So, who is left to be a part of a community like this?  It looks like first-time founders / unsuccessful repeat entrepreneurs who don’t know how to find email address on the web.  Yes, I’m being a bit glib, but the bottom line is that I’ve never thought that the "best of the best" would end up a part of such a community and is the reason why there isn’t one today and probably not one tomorrow.

Do All Venture Capitalists Come From Harvard or Stanford?

Q: I am wondering why is it that the vast majority of all VC partners either come from Harvard or Stanford?

A: (Jason)  I’ll tell you as a University of Michigan guy, it certainly seems like a lot of VCs have pedigrees from Harvard or Stanford, but plenty of folks have degrees from other places too.  We have 5 partners and “only” two have a Stanford pedigree.  Clearly none of us were smart enough to get into Harvard, although Brad went to MIT and I think that qualifies. 

I won’t try to opine that I really know the percentage of VCs with Harvard or Stanford backgrounds, but I searched around the web today and looked at some of my colleagues educational institutions and it appears that much less than half have degrees from there. 

Great Book on Legal Issues Affecting Entrepreneurs

We get a ton of legal questions on this site.  We can’t answer them because if we act as your lawyers, you can sue us.  That would not be fun.  However, fear not, there is a GREAT book on most all of the issues that affect the entrepreneur.  The Entrepreneurs Guide to Business Law.  The book’s co-author is Craig Dauchy from Cooley Godward Kronish and along with his accomplice Constance Bagley from Harvard, they’ve written what I consider to the be the definitive treatise on the subject.  I love my first and second edition copies, have them on my desk and still refer to them often.  This is an easy read, but very rich in content. 

If you are an first-timer or seasoned veteran, read this book.  I guarantee at a minimum you’ll be a better consumer of legal services and save yourself time and money.

Do Credit Market Problems Affect the Venture Capital Industry?

Q: How do/will market corrections like we’ve seen in the US affect venture funds and venture funding, even if concerns are supposedly only about the housing credit market?

A: (Jason). No one can say for sure, but some folks think the credit crunch will be helpful to VC fund raising. The idea is that with rising interest rates, buyout and other PE activities will slow and investors will turn to venture capital funds to place their alternative assets class investment funds. We’ll see if this actually plays out. There have been some early observations, but it will be some time before we know of the first and second order effects, if any.

Why Are Venture Capitalists So Hard To Deal With?

One of the questions that we get most often is “why are VCs such jerks?” or some sort of derivation thereof. Specifically, people complain about:

- VCs not returning calls / being unresponsive

- VCs not understanding how good of an investment my company is

- VCs stringing along entrepreneurs when they know they aren’t going to fund a deal

- VCs being “know it all board members”

- VCs being unapproachable in general

I won’t try to defend all VCs. In fact, I’ve seen all of this behavior from other VCs and I don’t condone it in any way. How does one avoid these behaviors? The key is picking good VCs to work with, but also to be self aware of your particular situation. I’ll try to address the particular complaints above by illustrating some situations that I’ve seen and also try to give you some insight into what might be rattling around in your VC’s head.

Issue 1: VCs not returning calls / being unresponsive.

Why is this happening to me? It could be that your VC is just too busy. They may have a prior investment that is suddenly requiring a lot of time, they may be looking at a ton of new deals, they may be fundraising themselves, etc. It’s not uncommon for one deal to take 100% of a VCs time if it is going through a merger situation or complicated financing. In this case, don’t take it personally.

I’ve seen some cases where the entrepreneur’s actions have led to perceived unresponsiveness. If an entrepreneur cold-calls a VC looking for funding, I wouldn’t expect a call back normally. I answer all of the emails that I get, regardless if I know the person sending it, but 5 minute phone calls that go on forever from someone that I’ve never heard of usually don’t get returned.

I’ve seen other cases where the entrepreneur sends an email every day to the VC wanting an update. This can get annoying and doesn’t lead to someone wanting to respond quickly.

Also, I hate to say it, but maybe the VC just “isn’t into your deal” and it’s at the bottom of his or her list. Sometimes unresponsiveness is indicative of interest. We try very hard to let people know quickly whether or not we are interested, so that folks don’t end up in this “bucket” but many VCs don’t operate this way.

Finally, maybe your VC is just an unresponsive person and you don’t want to work with them.

Knowing which one of these fact patterns that you fall into is easier if you are self aware and also have a transparent line of communication with your VC.

Issue 2: VCs not understanding how good of an investment my company is

Why is this happening to me? “I have the greatest idea in the world and no VCs see this – are they all idiots?” This is a reoccurring theme. I think the biggest disconnect here between VCs and entrepreneurs are *why* VCs may decline to pursue a deal. It might not have anything to do with your idea at all.

You *may* have the greatest idea in the world. A VC may still decline if the deal is outside of his / her investment thesis, is located somewhere that they don’t want to invest, or if they think the management team is not the correct team for the company.

You also may NOT have the best idea in the world. Perhaps the VC has seen similar ideas fail, or has some knowledge of a better prepared competitor in your space. Maybe your idea is just not that compelling.

Or perhaps, all the VCs you’ve met are idiots. It’s happened before where good ideas have been turned down by numerous VCs, only to find one later that funds it to great success.

Issue 3: VCs stringing along entrepreneurs when they know they aren’t going to fund a deal

Why is this happening to me? It shouldn’t. This is one behavior that I’ve seen that I personally have no tolerance for. Yes, it isn’t fun to tell someone that you aren’t going to fund their deal, but the only honorable thing to do is tell an entrepreneur this as soon as you’ve made up your mind.

Issue 4: VCs being “know it all board members”

Why is this happening to me? This situation is rarely one-sided – it’s usually the fault of both VC and entrepreneur, but it’s usually between the following polar extremes:

1. The VC is a complete idiot, doesn’t pay attention to the company at all, only shows up for the board meetings and then sits there and espouses “wisdom for all to hear.”

2. The Entrepreneur always thinks he/she is correct and that “no one could possibly know more about my company than me” and completely ignores the VC who has experience across many different companies.

In reality, most times I see this dynamic of “my VC is a jerk on my board” the truth is that it lies somewhere between these two extremes. I’ve seen situations that were very clearly biased towards each sides of the spectrum, however.

Issue 5: VCs being unapproachable in general

Why is this happening to me? This one is strange to me, because it would seem the whole VC community has become much more open and transparent over the years. From blogs, to speaking panels, VCs are more “out there” than they’ve ever been. Hopefully from this blog, folks at least think a few VCs out in Boulder, CO are completely approachable.

In summary, I think it’s hard to brand all VCs as “jerks.” I think some of the “poor” behavior is simply poor behavior, but some of it is perceived through rose-colored glasses of some entrepreneurs. You should also check our Bill Burnham’s post on “Why your VC is Acting Crazy.”