The Gig Economy

I love the Economist.  But, this article, given my everyday experience, doesn’t feel right – kinda like Robert Solow’s quote back in the ‘80’s, “You can see the computer age everywhere but in the productivity statistics.” (https://en.wikipedia.org/wiki/Productivity_paradox).
My own view is that IT didn't really add to “white collar” productivity until (1) it became (widely) networked, (2) network connections were always-on and (3) computing/communications devices were always connected to the network.  Standalone PCs are better than typewriters, adding machines, mimeograph machines, etc., but not exponentially better – (one of my favorite quotes from an author I know illustrates this:  “Giving everyone a word processor will not significantly increase the number of great novels that get written.”).
Not sure what the analog is w/r/t the Gig Economy.

True or not, the good news is that it’s certainly not a widely-held belief in the investor community.

The "Forgotten Founder" — How to Avoid This & Related Problems

Startup teams form in many different ways. Often, the “core” founder does some homework and recruits the founding team. Sometimes, teams are, more or less, recruited by a VC who has a startup idea but needs entrepreneurs to make it a reality. Most often, however, startup teams are formed by people who either currently work together (at the company they’re planning to leave) or who have worked together in the past. In my experience, this process is usually informal and based at least in part on a (sometimes fuzzy) mixture of friendship and perceived competence. As I’ve written here , here and here, it not infrequently goes wrong because one of the founders doesn’t work out and leaves the company with an equity stake disproportionate to the value he added – to the economic detriment of the remaining founders. 

There’s a flip side to this problem as well. 

I call it the problem of the “forgotten founder,” and here’s how it works. 

As noted above, most often startups are the result of informal “nights and weekends” discussions among friends. Not infrequently, the cast of characters changes over time, with “peripheral” people leaving and joining the core group. Early on, the group rarely has any formal legal structure. That is, the group is not usually formally established as a corporation until the founders “get serious”. Incorporation involves lawyers, and most founders don’t have “that kind of money” – certainly not to spend on lawyers. 

Even after the founding team has coalesced, quit its jobs and decided to “go for it”, a VC financing can take a long time. To entrepreneurs, the VC world moves at a glacial pace, even at its best. During this part of the process, it’s also not unusual for one or more of the founding team to leave. Reasons vary. Quite often, however, the departing team member has a spouse and kids who need to be supported, and their net worth is insufficient to sustain them for long without an income. 

What’s the problem? 

It involves two related legal concepts: (1) what type of legal entity, if any, has been formed during the “nights and weekends” phase and (2) what ownership rights can be claimed by someone who participated in the startup discussion and brainstorming – but who didn’t stay on part of the team. 

Forgotten Founder Situation #1. In the early, informal stages of forming a company, you don’t want to be deemed a “general partnership” – for a bunch of reasons. One important reason is that the rules on (1) whether a general partnership has been formed and (2) who’s a general partner (and therefore possibly entitled Continue reading "The "Forgotten Founder" — How to Avoid This & Related Problems"

More on Tough Questions

In a recent post, I advised entrepreneurs seeking VC funding to think carefully about choosing their co-founders. I claimed this decision is often gotten wrong and that, not infrequently, one or more co-founders leave the company with an amount of founder’s equity disproportionate to their contribution (in the eyes of their co-founders). Finally, I noted that, in this situation, the “remaining” co-founders almost always bear the economic brunt.  How to avoid this? I wish I had a crisp, clean and clear answer. Like a lot of other important questions in life, however, the answers are messy, ambiguous and highly context-dependent. All of us, VC’s and entrepreneurs alike, wish we could just call up “Central Casting” and order “the perfect startup team”. But, of course, we can’t. That said, there are some useful ways to think about this situation, and, below, I’ve set out some guidelines that a VC will likely use in evaluating this aspect of a startup. I hope these will be helpful to entrepreneurs as they’re building out their co-founding teams. As I mentioned here, founders don’t always pick their co-founders with a beady, cold-eyed, calculating gaze, and with a tough-minded focus on who can actually make the biggest contribution to the Company over its lifetime. Instead, co-founders are often picked because they are friends, or like-minded, or “great people, the kind you’d pick if you were in a foxhole under fire”. For any entrepreneur contemplating starting a company, there is an interesting and helpful analysis of this “choosing-who-to-work-with” phenomenon in a June 2005 Harvard Business Review article entitled “Competent Jerks, Lovable Fools, and the Formation of Social Networks”. If you don’t have access to a hard copy, you can purchase reprints online at:  .http://harvardbusinessonline.hbsp.harvard.edu/b02/en/common/item_detail.jhtml?id=R0506E  Starting a company is an act of courage. It’s also tremendously complicated. Almost always, the elements that are “unique” to a particular startup are as important as the elements that are “common” across the universe of startups. As with any set of simple guidelines, the ones below should be considered with a grain of salt. When applying them to your startup, keep your common sense hat on tight at all times.  1. Incomplete Team vs. the Wrong Team Member?  A key question any founder seeking VC financing needs to answer is “How complete does my team have to be?” On the one hand, experienced teams with domain expertise covering the principal startup business functions (e.g., product development) are very attractive to VC’s. On the other hand (as I’ve previously posted), teams with the “wrong” people on board are less attractive. A person can be “wrong” for a Continue reading "More on Tough Questions"

More on Tough Questions

In a recent post, I advised entrepreneurs seeking VC funding to think carefully about choosing their co-founders. I claimed this decision is often gotten wrong and that, not infrequently, one or more co-founders leave the company with an amount of founder’s equity disproportionate to their contribution (in the eyes of their co-founders). Finally, I noted that, in this situation, the “remaining” co-founders almost always bear the economic brunt. 

How to avoid this? I wish I had a crisp, clean and clear answer. Like a lot of other important questions in life, however, the answers are messy, ambiguous and highly context-dependent. All of us, VC’s and entrepreneurs alike, wish we could just call up “Central Casting” and order “the perfect startup team”. But, of course, we can’t. That said, there are some useful ways to think about this situation, and, below, I’ve set out some guidelines that a VC will likely use in evaluating this aspect of a startup. I hope these will be helpful to entrepreneurs as they’re building out their co-founding teams.

As I mentioned here, founders don’t always pick their co-founders with a beady, cold-eyed, calculating gaze, and with a tough-minded focus on who can actually make the biggest contribution to the Company over its lifetime. Instead, co-founders are often picked because they are friends, or like-minded, or “great people, the kind you’d pick if you were in a foxhole under fire”. For any entrepreneur contemplating starting a company, there is an interesting and helpful analysis of this “choosing-who-to-work-with” phenomenon in a June 2005 Harvard Business Review article entitled “Competent Jerks, Lovable Fools, and the Formation of Social Networks”. If you don’t have access to a hard copy, you can purchase reprints online at: 

.http://harvardbusinessonline.hbsp.harvard.edu/b02/en/common/item_detail.jhtml?id=R0506E 

Starting a company is an act of courage. It’s also tremendously complicated. Almost always, the elements that are “unique” to a particular startup are as important as the elements that are “common” across the universe of startups. As with any set of simple guidelines, the ones below should be considered with a grain of salt. When applying them to your startup, keep your common sense hat on tight at all times. 

1. Incomplete Team vs. the Wrong Team Member? 

A key question any founder seeking VC financing needs to answer is “How complete does my team have to be?” On the one hand, experienced teams with domain expertise covering the principal startup business functions (e.g., product development) are very attractive to VC’s. On the other hand (as I’ve previously posted), teams with the “wrong” people on board are less attractive. A person can be “wrong” for a Continue reading "More on Tough Questions"

Some Tough Questions Entrepreneurs Should Ask Themselves

If you want to raise money from VC’s, here’s a really tough, really important question you ought to ask yourself very early in the process: “How many co-founders should I have?” Having the wrong “answer” to this question can make your life difficult in some subtle (and odd) ways. Plus, unlike some miscalculations, here the wrong answer hurts only the founders, not the VC or later employees. Here’s how to look for the right answer. Although entrepreneurs are motivated by things in addition to money, money’s important to everyone I’ve ever met trying to start a company. Monetary rewards in a startup, as everyone knows, ultimately derive from ownership of stock (not salaries or bonuses). Since there can never be more than 100% of the founders’ stock available for allocation, every co-founder should focus on ensuring that the allocation best matches the realistic, expected contributions of each founder to the success of the Company.  In Silicon Valley (assume it’s the same in other startup regions), “founders” have a bunch of iconic attributes, some good, some bad. Although we don’t, we should have a statue dedicated to “The Startup Founder” prominently displayed somewhere in Silicon Valley. Founders are passionate about their businesses, and will run through brick walls to make them succeed. In large part, Silicon Valley’s success is attributable to this passion and “never-say-die” attitude. That’s the good part.  Founders are also “expensive” in terms of equity (usually, and sometimes even rightfully, to reward them for taking the risk in joining a startup). Founders are harder than normal employees to transition out of the Company (not legally, just emotionally: “How can we fire Fred? He’s a founder.) Just like most people (including VC’s), founders usually have skills and experiences that are narrower than they, themselves, believe (even sincerely). And finally, founders don’t always pick their co-founders with a beady, cold-eyed, highly calculating gaze with a tough-minded focus on who can actually make the biggest contribution to the Company. Often, co-founders are picked because they are friends, or like-minded, or “great people, the kind you’d pick if you were in a foxhole under fire”.  That’s the bad part.  Let me illustrate the problem with a hypothetical (though not uncommon) four-person startup.  Four friends decide to start a new company. After some jockeying (since they’re “peers” at their current company), they finally settle on the following titles, roles and percentages of the equity: (1) President and CEO (35%), (2) VP Marketing (25%), (3) VP Engineering (25%) and (4) VP Finance/CFO (15%). To them, it seems logical to have these four (eventually) important business functions covered by the founding team. Moreover, these responsibilities roughly match Continue reading "Some Tough Questions Entrepreneurs Should Ask Themselves"

Some Tough Questions Entrepreneurs Should Ask Themselves

If you want to raise money from VC’s, here’s a really tough, really important question you ought to ask yourself very early in the process: “How many co-founders should I have?” Having the wrong “answer” to this question can make your life difficult in some subtle (and odd) ways. Plus, unlike some miscalculations, here the wrong answer hurts only the founders, not the VC or later employees. Here’s how to look for the right answer.

Although entrepreneurs are motivated by things in addition to money, money’s important to everyone I’ve ever met trying to start a company. Monetary rewards in a startup, as everyone knows, ultimately derive from ownership of stock (not salaries or bonuses). Since there can never be more than 100% of the founders’ stock available for allocation, every co-founder should focus on ensuring that the allocation best matches the realistic, expected contributions of each founder to the success of the Company. 

In Silicon Valley (assume it’s the same in other startup regions), “founders” have a bunch of iconic attributes, some good, some bad.

Although we don’t, we should have a statue dedicated to “The Startup Founder” prominently displayed somewhere in Silicon Valley. Founders are passionate about their businesses, and will run through brick walls to make them succeed. In large part, Silicon Valley’s success is attributable to this passion and “never-say-die” attitude.

That’s the good part. 

Founders are also “expensive” in terms of equity (usually, and sometimes even rightfully, to reward them for taking the risk in joining a startup). Founders are harder than normal employees to transition out of the Company (not legally, just emotionally: “How can we fire Fred? He’s a founder.) Just like most people (including VC’s), founders usually have skills and experiences that are narrower than they, themselves, believe (even sincerely). And finally, founders don’t always pick their co-founders with a beady, cold-eyed, highly calculating gaze with a tough-minded focus on who can actually make the biggest contribution to the Company. Often, co-founders are picked because they are friends, or like-minded, or “great people, the kind you’d pick if you were in a foxhole under fire”. 

That’s the bad part. 

Let me illustrate the problem with a hypothetical (though not uncommon) four-person startup. 

Four friends decide to start a new company. After some jockeying (since they’re “peers” at their current company), they finally settle on the following titles, roles and percentages of the equity: (1) President and CEO (35%), (2) VP Marketing (25%), (3) VP Engineering (25%) and (4) VP Finance/CFO (15%).

To them, it seems logical to have these four (eventually) important business functions covered by the founding team. Moreover, these responsibilities roughly match Continue reading "Some Tough Questions Entrepreneurs Should Ask Themselves"

Success = Co-founder vs. Failure = "Early Employee"

Have you ever noticed, that, after the fact, successful companies have many "co-founders", while failed startups have only "early employees".

I first noticed this phenomenon when I was a VC, back in the early/mid-2000's.   PayPal had just completed the first "mega" acquisition of the post-dot.com-nuclear winter (the price was ~$1.5 Billion -- pocket change, it seems, in today's frothy M&A environment). 

As typically happens after acquisitions like this, the PayPal employees began to trickle out of eBay over the next year or so.  This occurred for all of the usual reasons that plague post-acquisition integration:  financial reasons (becoming fully vested, etc.), as well as a mismatch between the cultures of the two companies that began to wear on both sides.

In this diaspora, some went into venture capital, some "retired" and, among a number of other pursuits, some went on to start new companies.

As these startups began to pitch the VC community, a number of them came through my firm.  I began to notice that anyone who had worked at PayPal in the first year of its existence identified themselves as a "Co-founder".  Through coincidence, I happen to know a lot about the actual facts of the founding of PayPal (actually, two separate companies that, after a year or so, merged to become the "PayPal" that we all remember today). 

So, I knew that most of the claimants were, in the charitable cases, puffing, and, in some cases, simply misrepresenting the facts.  The human desire to bask in reflected glory is deep and longstanding, but it always lowered my estimation of the person who falsely made the claim.  Normally, it was enough of a reason for me to pass, and move on to the next company.

Surprisingly to many people, and unlike seemingly similar terms, such as "Chairman", "CEO", "Board Member", "VP Marketing", the term "Founder" has no legal significance.  It's not mentioned in any corporation law or regulation, and no legal penalty attaches to its mis-use.  No legal obligations flow from calling oneself a founder (unlike the legal job categories listed above).  So, naturally, one would expect "title-inflation" to occur here -- and it does.

The history of Facebook is a more recent object lesson in this phenomenon.

The caution offered here is that Silicon Valley, for better or worse, is a small town, and the early histories of many companies, especially the successful ones, are well-known.  It doesn't help, and can harm, your chances of getting financed by falsely claiming co-founder status.

Success = Co-founder vs. Failure = "Early Employee"

Have you ever noticed, that, after the fact, successful companies have many "co-founders", while failed startups have only "early employees". I first noticed this phenomenon when I was a VC, back in the early/mid-2000's.   PayPal had just completed the first "mega" acquisition of the post-dot.com-nuclear winter (the price was ~$1.5 Billion -- pocket change, it seems, in today's frothy M&A environment).  As typically happens after acquisitions like this, the PayPal employees began to trickle out of eBay over the next year or so.  This occurred for all of the usual reasons that plague post-acquisition integration:  financial reasons (becoming fully vested, etc.), as well as a mismatch between the cultures of the two companies that began to wear on both sides. In this diaspora, some went into venture capital, some "retired" and, among a number of other pursuits, some went on to start new companies. As these startups began to pitch the VC community, a number of them came through my firm.  I began to notice that anyone who had worked at PayPal in the first year of its existence identified themselves as a "Co-founder".  Through coincidence, I happen to know a lot about the actual facts of the founding of PayPal (actually, two separate companies that, after a year or so, merged to become the "PayPal" that we all remember today).  So, I knew that most of the claimants were, in the charitable cases, puffing, and, in some cases, simply misrepresenting the facts.  The human desire to bask in reflected glory is deep and longstanding, but it always lowered my estimation of the person who falsely made the claim.  Normally, it was enough of a reason for me to pass, and move on to the next company. Surprisingly to many people, and unlike seemingly similar terms, such as "Chairman", "CEO", "Board Member", "VP Marketing", the term "Founder" has no legal significance.  It's not mentioned in any corporation law or regulation, and no legal penalty attaches to its mis-use.  No legal obligations flow from calling oneself a founder (unlike the legal job categories listed above).  So, naturally, one would expect "title-inflation" to occur here -- and it does. The history of Facebook is a more recent object lesson in this phenomenon.

The caution offered here is that Silicon Valley, for better or worse, is a small town, and the early histories of many companies, especially the successful ones, are well-known.  It doesn't help, and can harm, your chances of getting financed by falsely claiming co-founder status.

Managing Your Board of Directors — Great Advice, From Someone Who’s Good at It

Here is some advice for CEO's from a good friend of mine, John Kernan.  John has been a successful serial entrepreneur for 40 or more years.  John has, over the years, run companies that have been wildly successful, as well as a couple that have failed.  Over this long career, John developed a set of "rules" that help a CEO keep his (or her) board focused on helping move the Company forward. I've worked with CEO's for more than 35 years, as a lawyer, as a VC and, nowadays, as a "Sherpa", and John is the best CEO I've ever met at "managing" his board of directors.  In today's world, the term "managing", when used  in connection with an information-intensive process (like CEO/Board relations), frequently takes on a negative connotation.  I mean something different and positive. What the 10 rules listed below are aimed at doing is helping the CEO use the Board of Directors in a way that best helps the Company make progress -- not by hiding information (you'll see below John's advice on dealing with bad news), but by being aware that one's board of directors, like any group of human beings, can be organized in a way that is constructive -- or not.  Successful CEO's realize this and proactively try to get their boards to operate in a way that best helps the Company -- it will not come as a surprise to anyone that Boards don't necessarily self-organize into highly efficient, constructive, high-powered and helpful groups of advisers. Here's his take on how to do this. 1. NEVER have the board meeting "at" the board meeting.  ALWAYS call every director a few days before the meeting and run every important issue by them to get their input, Also update them on company performance, especially the bad news, and let them "beat you up" privately. That way, the meeting can focus in a constructive fashion on problem-solving and building the Company for the future.  2. Maximum PowerPoint show is four slides from any presenter, especially yourself. This should be the limit of director interest in detail.  3. Provide complete access for the board to everyone and everything in the Company. They will rarely use it, but it's a great comfort to them to know you are not trying to hide anything.  4. Have your key team members do almost all the presentations. It gives them exposure and allows you to make sage comments along with the rest of the board. A perfect board meeting is when 10% of the talking is done by the CEO, 60% by the team, and 30% by the directors.  5. Continue reading "Managing Your Board of Directors — Great Advice, From Someone Who’s Good at It"

Entrepreneurs: Are You Lost? How To Tell Where You Are in the VC Fundraising Process

As in many other situations involving asymmetric power relationships, VC’s (who usually have the power) like to preserve optionality with startups in which they’re interested (as I wrote here).  That is, VCs generally will try to keep interesting deals “on the hook” until they have to make a decision (usually driven primarily by the concern that other VC’s are converging on the deal).  From the VC’s POV, this is eminently rational.  Why make a risky decision (i.e., whether to invest) until you have to – waiting may allow more data to emerge that will inform/improve your decision.  Accordingly, VCs, good ones anyway, become quite skilled at saying things, whether or not true, that make entrepreneurs think there’s serious interest in their deal. For the entrepreneur, this frequently leads to disappointment. Experienced entrepreneurs know that they cannot rely on anything a VC says about where the VC really stands.  As I wrote here, the only way to tell if a VC is interested in your deal is whether they are re-arranging their schedule to work on your deal.  If you're not pushing other stuff off their calendar, you're making no progress.  Whenever a VC misses a deadline in getting back to you, it’s a bad sign.  In general, given how time-consuming the fundraising process is,  the entrepreneur should consider that VC a “pass”, and focus fundraising efforts elsewhere. As an aside, in the roughly 20 years I spent as a lawyer representing entrepreneurs, I used to tell my clients that the worst curse they could inveigh against a competitor was that the competitor had to seek venture financing.  That guaranteed that the management team of the competitor would have to take their eye off the ball for 3-6 months. Even “scheduling-altering behavior” by the VC, however, is not always a good indicator of an eventual offer.  Many deals evoke an initial burst of activity by a VC (especially if the deal is perceived as “hot”), only to have the activity level fade and turn into a “pass”.  Not infrequently, in my experience in representing entrepreneurs as their lawyer, the last thing an entrepreneur may hear from a VC before “We’re going to pass.” is “Would you consider raising a bigger round, so we could write a bigger check?”.  The only certain way (as I wrote here) for entrepreneurs to know their deal is closing: when the VC’s wire transfer hits their account.  Until then, best to remain skeptical, and keep plugging.

Further aside:  VC’s often (indeed, most often for the vast majority of VCs) “communicate” that they’re not interested in an entrepreneur’s deal Continue reading "Entrepreneurs: Are You Lost? How To Tell Where You Are in the VC Fundraising Process"

"On Demand" Eating the World of Music, Too.

It's now a truism, or a cliche, to mention how the "On-Demand" economy is eating the world of personal services (Uber, Lyft, AirBnB, Task Rabbit, Postmates, Instacart and dozens of others).  Among a bunch of other reasons, millennials don't want to own things in the same way that we, their parents, did/do.  What is lesser remarked, but equally disruptive to a huge market, is that, as noted here in the Financial Times, the "On Demand" business model is also eating the music world - streaming has now outpaced downloads, with disruptive repercussions for an already beleaguered industry.

1998 — 1999 are Calling and They Want their Wild Abandon Back!

I love Tesla, and am a huge fan of Elon Musk (a former client from my lawyer days). But, reading this in a place like the FT (as opposed to (the long defunct) "Industry Standard", as well as "Upside", "Red Herring", "Wired") made the hair on the back of my neck stand up in alarm -- I thought I was having LSD flashbacks to 1998 - 1999, when statements like these (this one from today's FT) were thrown about with abandon:

  "Still, if you try to be rational, you are missing a big point in Mr Musk’s favour. Silicon Valley is currently obsessed with cars. More than that, those who mutter about the lessons of the last dotcom crash could be missing out on the next Amazon. If you had written off Jeff Bezos’ hubris, you would have missed one of the great investments of our age. You buy Tesla today so that in years to come, you can say you were there."

Advice on Hiring

Don’t hire people about whom you have doubts.  One will make plenty of hiring mistakes during one's business career by hiring people about whom one had no doubts, but who, nevertheless, don’t work out.  But, the failure rate on people about whom you have doubts is far higher.

Trust your doubts, especially as you gain hiring experience.  The best "gut" is fallible -- one will hire people who surprise one by not working out -- but still one's best guide.