Monday, September 24, 2007

David McClure: tellin' it like it is

Every once in a while I meet someone and get to talking about work history. They'll tell me where they worked before and I'll do likewise. Usually when I say I worked at Netscape from 1995-1999 I have to quickly add that I joined a week *after* the IPO so they don't make the mistake of thinking I actually made much money.

The way I do this is by saying that when I joined Netscape, I didn't know the difference between a IPO and a PPO. That was pretty much true at the time; remember, this was summer 1995 and the 'IPO' hadn't exactly become the household word it is today.

Since then I've worked at a bunch of startups, and each time I've started earlier and earlier stage, culminating with being one of the first three employees at Efficient Frontier - which has since gone on to kick pretty much everyone's ass in the SEM space.

You'd think that I'd know a ton about stock options, VC funding, liquidation preferences and cap tables by now, but the reality is I've never actually been the founder. I've avoided all that and instead found work at startups with interesting ideas and interesting teams.

The past 12 years has taught me a lot about all this, though, unfortunately the hard way. Things I've learned:

1) be 'in the know', or be screwed. Unless you are involved in the fundraising process directly, expect to never get all the details you need to correctly value the options you're working for.

2) 95%+ of all Silicon Valley startup employees are spineless jellyfish when it comes to sticking up for themselves in equity negotiations. Over the years as I've increasingly been at the forefront of equity knowledge discovery within the startups I worked at, I've also made the concurrent realization that most around me weren't asking for knowledge that management wasn't giving.

3) Absolute power corrupts, absolutely, and in the absence of employee unions and/or legislation, investors and founders hold 100% of power within startups. If you're a VC or a founder, you might be thinking to yourself "Yeah, that's *exactly* the way it should be you punk", but you'd be wrong to think that way, because which startup is successful is all about

E-X-E-C-U-T-I-O-N

and execution doesn't happen without motivated employees, and motivated employees don't stay motivated employees unless they have a reason to stay motivated employees.

All that said, I have to applaud David McClure for his great find & review of Leo Dirac's presentation on VC term sheets and liquidation preferences. If you want to go from being the Silicon Valley equivalent of a Microserf, check out Leo's presentation as well as Dave's great review.



You'll learn about all those things you vaguely were aware of, like preferred vs common, liquidation preferences and hopefully you'll be better prepared in your next startup to ensure that you know everything you need to know to go into that long hard schlog that is startup life with the right expectations.

4 Comments:

Blogger Johan Bosini said...

Hey there,

Your comment re. execution is correct. Many people have a great idea however it will be nothing more than an idea unless someone/some people take it and run with it. The credit can not go to the idea owner only.

Johan

7:03 AM

 
Blogger alphasource said...

c-zed:

http://www.venturehacks.com/ is good.

there is lots of work (which i till a few months ago was unaware of) done on how term sheet clauses are in many cases equally as important as firm valuation. so while knowing how much stock is outstanding and what the valuation of preferred and common are is important to know, the active apprentice will also review other factors: liquidation preference, anti dilution protection, allocation size of stock option pool, and inclusion of "pay-to-play" provisions. these are all important issues affecting firm valuation in both good and bad times.

while the details of a term sheet cannot be shared with a broad based group of employees, i do agree that openness is cerainly in paucity at private companies.

6:04 PM

 
Blogger searchquant said...

Interesting, alphasource. Why do you say the details of a term sheet can't be shared with a broad group of employees? If the terms in the term sheet reflect the reality of the funding round, why hide that from employees? They'll find out eventually anyhow, and if they decide they've been misled or not given critical details that determine the real value of their common shares, they'll likely be less motivated, right?

8:22 PM

 
Blogger alphasource said...

there could be a lot of details surrounding individual compensation (break up of equity among founders, MT, etc). i tend to think these are personal details.. but i do agree with your view on openness.

12:25 AM

 

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