Friday, July 28, 2006

Swapthing Widget: Want to Trade Books?

Given all of the recent buzz about Chris Anderson's new book titled "The Long Tail," I decided that I probably should get around to reading it. Yet, it frustrates me that I have so many business related books, which I've already read, that despite being in excellent condition are merely sitting on my shelf gathering dust. I think its important to stay up on the latest business ideas/trends but, I generally find most business books to be at least 90% crap so their value as reference material is very low. However, I recently discovered Swapthing, which facilitates bartering of goods and/or services and I love the idea of reusing my books by trading them for someone else's. Reusing is environmentally friendly and swapping is one transaction rather than buying and selling on eBay.

I'm curious to see how smooth the negotiation process of swapping goods without established values will be but otherwise Swapthing seems pretty cool and they definitely seem to be building momentum. In fact, they've even gone web 2.0 by creating community through "SwapCircles," widgets and a company blog. So if you have a bunch of business books gathering dust on your shelf and you'd like to swap with me feel free to join the SwapCircle that I created, Silicon Valley Entrepreneurs and/or checkout the new widget at the bottom of my sidebar. I'll add some more books that I have and that I want over the next couple of days but in the meantime if anyone has a copy of The Long Tail that they would like to swap for Naked Conversations or The Search, sign up for Swapthing and make me an offer!

Thursday, July 27, 2006

Floyd Landis Caught Doping

After completing one of the greatest comebacks in Tour de France history to take the lead on the last day of competitive racing, Floyd Landis has been caught doping. In fairness to Landis, his backup sample has not been tested to confirm the abnormally high testosterone and epitestosterone results and the accuracy of cycling's drug testing methodologies have been questioned many times. Landis's comeback during the last mountain stage was truly inspiring. I would like to believe that Floyd Landis's performance came from his superior training and determination and I hope that somehow his test result proves to be a false positive.

Wednesday, July 26, 2006

Venture Capitalists that Fail

Silicon Beat has an interesting article on the failure of Worldview Technology Partners that provides some interesting insight into why venture firms fail. Especially interesting are the comments that discuss one of the firms general partners. I think understanding how venture capital firms work and why they fail is important for entrepreneurs that are trying to raise capital. I'm curious to know what the Worldview partners learned from their failure and what their perspectives on the roles of luck and gut instinct in venture investing success are now.

Monday, July 24, 2006

Who Killed the Electric Car?... Really Sucks

Earlier this evening I watched “Who Killed the Electric Car?” at the Aquaris Theatre in downtown Palo Alto. I’m not going to mince words… the movie completly sucked. The way that the film built its arguments was pathetically unconvincing and I left the movie not knowing whether or not electric cars really would have made any impact on climate change even if they hadn’t been “killed.” I am an environmentalist and I wanted to like this movie but I wound up very disappointed.

My biggest overarching problem with the movie was its reliance on anecdotal “evidence” from electric vehicle owners to build almost all of its arguments. There were virtually no facts, studies or scientific explanations used to build any of the films arguments. Al Gore’s An Inconvenient Truth (which I also have some problems with) proved that it is possible to make a technical explanations that are digestible to the general public. There is a fine line between educating and boring people but simply relying on 10-20 electric vehicle owners statements that electric vehicles were great cars or that they were more efficient than gasoline powered without any explanation of why these statements were credible left me with lots of questions.

I was most interested to learn whether or not electric cars were truly more environmentally friendly than gasoline powered cars. While electric cars produce no emissions during the commute, they do create emissions at the power plant that supplies the electricity they run on. Hence, the trade off is between producing emissions from gasoline locally vs. producing emissions at the site of the power plant from burning coal. Coal is dirtier than gasoline but electric cars are more efficient than gas powered cars. The film has a Toyota executive that worked on electric cars saying the environmental benefits are low because of the need to burn coal versus one of the electric vehicle owners claiming that the electric vehicles efficiencies more than offset the emissions from burning coal. Yet, these are merely statements and they are not backed up by any explanation whatsoever. I would have loved to have seen figures that detailed the comparison and possibly a brief discussion of what percentage of electricity is generated from coal, natural gas and renewable sources. Furthermore, there is no discussion of the negative environmental impact of the electric vehicle batteries. To clarify, I’m not suggesting that electric vehicles wouldn’t have had a positive environmental impact (because I don’t know), rather that the movie does a terrible job of describing what I felt was its most compelling and interesting point.

Also, I found the arguments about the demand for the electric vehicles lacking any credibility. Of course the 10-20 people who bought electric vehicles and agreed to be interviewed for the movie were going to praise their cars… they were a self-selecting group of enthusiasts! I would have like to have seen comparisons between the electric vehicles power, safety and cost with those of their gasoline powered counterparts. Furthermore, the stats provided on the limited range of electric vehicles were also misleading. According to the film, the average American commutes 29 miles per day and electric vehicles had ranges of 60-100 miles. Thus, it is claimed that driving electric vehicles was possible for most consumers. Yet, while this may suffice for day-to-day driving most people eventually do take longer trips, which is often when public transportation is least convenient. For example, driving into San Francisco for dinner or a concert from the Peninsula or South Bay, which is a common occurrence for many, would be pushing this range limit. I just don’t find the films argument that the electric vehicles really provided a viable and/or desirable alternative to the combustion engine to be convincing.

The movie also places way too much attention on GM’s decision to crush and shred its remaining EV1s. The implication is that GM was somehow involved in a conspiracy to ruin the EV1 and wanted to clear up all evidence of its existence. However, I don’t see any conspiracy in GM’s desire to try and erase the memory of a weird looking car with abysmal sales. Also, while I am strongly biased against all American car companies as inept bureaucracies, even I can’t see GM executives being dumb enough to scrap a product line that they believed would be profitable. In fact, the movie even points out that the costs of manufacturing were high and many of the sources of reoccurring revenue such as maintenance costs and spare parts were much lower in electric vehicles. It is still possible that GM executives were wrong about the profitability of electric vehicles, but if so, they were not alone. Off the top of my head, I know that Toyota, Honda and Ford also made electric vehicles that they no longer offer. If there really was money to be made in electric vehicles wouldn’t at least one of these car companies have tried to capture the market? The over-emphasis on GM’s decision to shred the EV1s was ridiculous and the automotive manufacturers conspiracy implications seemed propped-up.

Lastly, I was shocked that the movie didn’t compare the environmental impact of electric vehicles with hybrids. Didn’t hybrids start selling about the same time that electric vehicle product lines were scrapped? Maybe the rise of the hybrid car is what killed the electric vehicle. I left the theatre thinking that if hybrids do have similar positive environmental impacts as electric cars than the movie really has no argument at all.

Saturday, July 22, 2006

Venture Capital Success: Luck vs. Gut

Paul Kedrosky sparks an interesting debate with himself in two separate posts over whether or not successful venture capitalist have a keen gut instinct (7/21/06) or are just plain lucky (12/3/05).

As I wrote in a comment* on Mr. Kedrosky's 12/3/05 post on luck, I believe that there are many aspects of success that make additional success easier, such as reputation, contacts and just plain having seen the show before. However, I suspect that both luck and gut instinct also play roles in venture capital success... as they do in many aspects of life. I do believe that there are some circumstances where data and/or indicators of success are only recognized subconsciously, which creates a hunch or gut instinct. Yet, the concept of gut instinct is over used. Furthermore, gut instinct is commonly used to explain success that otherwise has no explanation, ie, luck. Frankly, whenever someone attributes past success to gut instinct it sets alarm bells off with me.

*Too bad I didn't have coComment then!

Friday, July 21, 2006

Bush's New Coalition Building Strategy

Who says Bush never reaches out to the international community?

      TechCrunch Party... Sign Up Fast

      Michael Arrington is throwing another TechCrunch party and this time its going to be hosted by August Capital. The party is taking place in Menlo Park on Friday, August 18th from 7pm to 11pm. I've never been to a TechCrunch party but they are supposed to be a lot of fun and they definitely sell out fast. There is room for 500 people but my guess is that all of the slots will be taken by the end of the day. If you want to attend, you can add your name to the registration wiki here, but I suggest you do it ASAP.

      CoComment is Very Cool

      I just discovered CoComment via Fred Wilson's Blog and so far it seems pretty cool. CoComment tracks comments and responses that one make across the blogsphere in one central location, which makes it much easier to follow the conversations. However, the feature that I like best is the blog comment widget, which tracks the comments of the blog's author across the blogsphere. The sidebar makes a lot of sense to me because if I take the time to read someone's blog I am usually interested in the comments that they make across the blogsphere. Thus, I hope that CoComment sidebars will become more popular and in the meantime I hope that everyone enjoys better access to my own comments.

      The only drawback to CoComment that I've found thus far is that it doesn't seem to work well with Blogger. As you can see in the picture on the left, CoComment seems to think that the post is Blogger is a comment. Its still pretty cool if you ask me and if this post turns out okay than the it Blogger issue obviously isn't that big of a deal.

      Thursday, July 20, 2006

      Floyd Landis!

      Floyd Landis rode one of the most inspirational stages I've ever seen in the Tour de France earlier this morning. Two days ago Landis took the race lead while confidently riding up the infamous Alp d'Huez. Landis's form suggested that he was poised to wear the yellow jersey the rest of race. However, yesterday Landis cracked in spectaular fashion (crappy video) when he was dropped from the breakaway with only 18K left in the stage. Over the final climb Landis 'bonked' struggling to keep peddling and ultimately lost 10 minutes, which dropped him from 1st to 11th. Moreover with only a handful of stages left Landis's Tour appeared to be over.

      This morning, in the last mountain stage of the Tour, Floyd Landis broke away from the pack going up the first mountain ascent and he never looked back. Landis won the stage by 5:42 over the second place Carlos Sastre and 7:08 over racing leading Oscar Pereiro. With the 30 second time bonus that he achieved for winning the stage, Landis clawed his way from being 8:08 minutes back in 11th to just 30 seconds back in 3rd place. With just 3 stages left the Tour appears to be a 3 man race between Pererio, Sastre and Landis that will likely be settled Saturday in the individual time trial. When Landis had held the yellow jersey earlier in the Tour the French press had accused him of riding without any style. I wonder what they think of him now?

      Wednesday, July 12, 2006

      Networking & Helping Others

      Dharmesh Shah wrote a post last week titled Don't Always Be Closing that got me thinking about a fundamental mistake that many people make in their approach to networking. Dharmesh's point is that he grows tired of constantly feeling like people are trying to sell him something and that he appreciates getting to know people and having interesting conversations that aren't necessarily motivated by a desire to close the next deal. I think what Dharmesh is describing is the feeling of being used and the "what can you do for me" approach to networking definitely leads many similar feelings.

      My approach to networking is to focus on what I can do for the other person. In some cases there isn't anything I can do for the other person but everybody could use a hand somewhere and most people seem to appreciate the effort regardless of the results. I find that I build trust and get to know people better by trying to help them. Additionally, the approach gets easier over time because the better I get to know people the more I understand what they need. Having a growing group of contacts who's needs I understand makes it easier for me to make valuable connections when I meet someone new. Furthermore, If I can connect someone old with someone new than I build trust and good will with both people. This means that by focusing on how I can help whomever I've just met, I often wind up helping two people.

      Taking the longer term approach of building trust and good will by helping others is what has allowed me to build relationships where by others are genuinely willing to help me.

      Stirr Mixer 4.0 Tonight in Palo Alto

      Stirr is holding their 4th mixer of the summer tonight starting at 6pm at the Blue Chalk Cafe in Palo Alto. Stirr has quickly become one of my favorite networking events because it is an interesting group of people and a relaxed/fun atmosphere. The audience is predominantly startup co-founders, investors and PR folks. The list of tonight's attendees can be found here. Each event also features an elevator pitch from several interesting new startups, which in some cases have used Stirr as their first public launch.

      The companies presenting this eveing are:
      • CrowdFactory, Alexander Mouldovan, CEO
      • EchoSign, Jeffrey Zwelling, Co-Founder
      • Gliffy, Chris Kohlhardt, Co-Founder
      • Jajah, Jakob Snilsberg, VP Business Development
      and here is a list of companies that have presented at previous events.

      Monday, July 10, 2006

      Convergence of Advertising & Channel Sales?

      It seems to me that one clear trend which the Internet has facilitated over the last 10 years is the increasing efficiency of advertising. The first contextual banner ads were sold cost-per-thousand (CPM). While they may not necessarily have been much more targeted than advertising to targeted audiences through niche magazines, banner ads did open up new ways to track the performance of the campaigns through clicks. Next GoTo pioneered targeting ads based on search words, which greatly increased click through rates and lead to the growth of the cost-per-click (CPC) model. Through CPC pricing the advertisers only paid for the ads that really generated interest in their products.* Yet, advertisers soon realized that while it was easy to track the number of clicks a search term generated, it was difficult to determine the relationship between clicks and sales. Cost-per-action (CPA) added even more efficiency to the process because it allowed advertisers to pay only after the prospect took certain steps such as leaving contact information. Acquiring the prospect's contact information increased advertising efficiency because it allowed the advertiser to proactively follow up on the leads generated. However, Google Checkout seems indicate a shift towards actually facilitating the sale, in which case advertisers could deliver 100% efficient marketing campaigns. Under the Google Checkout model it would seem that the most appropriate pricing structure would be a percentage of the purchase price and this starts to look a lot like channel sales to me.

      Whether its Ebay+PayPal, Craigslist+RapLeaf, Yahoo, Amazon, Google or Snap that becomes the market leader I think the idea of advertisers facilitating sales will clearly take hold in some form because it is such a quantum leap in terms of advertising dollar ROI. What I find interesting is what will happen to distribution channels as this trend takes hold. The issue of order fulfillment still remains but I wonder if this is the step that concentrates buying direct from manufacturers like Adidas and the end of At the very least, I think this trend will put downward pressure on distributors' margins.

      Advertising platform facilitated sales is likely to evolve most quickly in consumer products but channel sales have long been a frustration to B2B vendors and I suspect that many would be very open to the concept of reducing channel managemnet costs through 100% efficent marketing campaigns. Most enterprise sales are more complex and have a greater number of stake holders than a decision to purchase a consumer product. Purchasing decisions of $6 or 7 figure enterprise sales simply require too much research, time, evaluation, approval and/or customization for an advertising platform to create the lead and facilitate the sale in the same transaction... I just don't see carrier class routers being purchased through Google any time soon. However, I could see this working for SAAS and other low customization products in the SMB market. The lower the complexity of the sale, the greater the ability for the advertising platform to facilitate it.

      I wouldn't claim to have any clue how exactly this will play out but I do think that over the next 5 years we will see major collisions between the portals, search engines and ecommerce sites and I suspect the biggest losers will be distribution channels.

      *excluding click fraud

      Sunday, July 09, 2006

      Full Text Now in Feed

      At the request of Zoli, I am now publishing my feed with the full text of my posts. I really appreciate this kind of feedback and I'm curious to know if anyone else has any additional thoughts on how I can improve the functionality and/or usefulness of this blog.

      Saturday, July 08, 2006

      Santa Barbara & San Diego

      Over the last couple of days I have been on a mini road trip down the coast of California in order to attend a Cousin's wedding in San Diego. Despite the fact that I've lived in Northern California for 22 years, I'd never been to Santa Barbara or San Diego so the wedding seemed like the perfect opportunity to drive down the coast. I spent Wednesday and Thursday in Santa Barbara and yesterday in San Diego. I'm back in Santa Barbara now and I'll drive back North tomorrow after the World Cup Final.

      All I can say is wow... these are definitely two incredible places and I can't believe that I waited this long to check them out. I am a huge fan of Palo Alto but I have to admit that State Street in downtown Santa Barbara is more beautiful than University Ave. Santa Barbara has great beaches, nice restaurants, incredible roads for cycling (Team Discovery is headquartered close by in Solvang) and a climate that is perfectly warm without being too hot. While Santa Barbara is a very modern city it doesn't feel overcrowded or built up and the Spanish style buildings give the entire town a feeling of history. I spent less time in the San Diego area but La Jolla was equally spectacular.

      I suspect that most people visiting California spend the majority of their time in either San Francisco or Los Angeles but for anyone seeking a California beach vacation should definitely consider Santa Barbara or San Diego as their primary destination.

      Wednesday, July 05, 2006

      My Next Moves

      Chris Yeh asks what I am doing next in a comment on my Lessons from Cryptine Networks Failure post. At this point I am not sure what my next move will be. My top priority is to find a great team that I can contribute to and learn from. Title and role are less important to me but I do have a little bit of experience in sales, marketing and business development and these are the areas where I would probably contribute the most. I also enjoyed the exposure to product management that Cryptine Networks gave me but I am much greener in this area. My preference would be to find another startup to join and ideally in security but its really the team that is most important to me.

      I'm not sure how long it will take me to find my next gig but at the moment I do have some extra time on my hands and I would be happy to help other entrepreneurs if I can. I certainly wouldn't call myself and expert but I do think that I've become pretty solid at writing elevator pitches, executive summaries and power point presentations for investors. (see the links in my sidebar) I may also be able to help with sales pitches or marketing materials for entrepreneurs in security. I don't want to take on any long projects and I'm not looking for any compensation because I don't want to make commitments while my next moves aren't clear. However, as long as my schedule stays relatively flexible I'm happy to try and help other entrepreneurs with a couple hours of my time.

      If I might be able to help you or if you know of any opportunities that might make sense please drop me a line at:

      afife "at"

      Blogged with Flock

      Blogging & Networking

      Is blogging the new networking? Are we more likely to conduct business with people we share dinner with at the Churchill Club or those we get to know through blogging? I've been blogging since January and I haven't done any business or met face-to-face with anyone that I've gotten to know in the blogsphere. But that said, I have gotten to know a number of entrepreneurs, investors and other generally interesting people through blogging. On the other hand, I've certainly set many appointments for myself and others by making the rounds through the Silicon Valley networking scene. Nonetheless, the comparison isn't totally fair because I've been attending SDForum events a lot longer that I have been blogging.

      Should blogging be the new networking? Meeting someone in person is a more powerful experience than a single comment or link but overtime I think that blogging can build stronger relationships. Participating in the blogsphere provides a so much more information than chatting over a cocktail at SVASE. In person networking definitely provides more instant gratification and I think it would be quite strange to follow up on an initial blog comment with an email to the post's author asking for an appointment, introduction or favor. However, in the long run networking through blogs may be more effective because by reading someone's blog you can really get to know what they are interested in. Furthermore, by commenting on and linking to their blog, they are likely to get to know more about you... Networking gets pretty darn effective when you know what the other person wants and they know who you are. It seems to me that blogging may be becoming the more effective way to network.

      Some common sense rules would seem to apply in the blogsphere and much like in person networking the big fish are going to be harder to reach. For example, if you happen to meet Don Valentine, he's probably already gotten 10 business cards that day and I bet his calendar is booked 6 months out so its going to be tough to get a meeting with him. Similarly, if you'd like to get to know Michael Arrington one or two comments on TechCrunch isn't likely to get you a lunch appointment. It is possible to reach these people but its going to be difficult without an existing connection. Yet the more often one reaches out to people through comments or links and the more information one puts out there about themselves through their own writing the more likely they are to build strong relationships across the blogsphere.

      Also, I suspect that effective networking bloggers (as with traditional networkers) will focus on building relationships and helping others more than seeking immediate personal gain.

      Monday, July 03, 2006

      Key Lessons From Cryptine Network’s Failure*

      Several weeks ago Cryptine Networks failed as a security software startup. While this has been a frustrating and painful experience it has taught me valuable lessons about corporate structure and stock vesting that I feel compelled to share with other early-stage entrepreneurs.

      Started As Consulting Firm

      Cryptine Networks was incorporated with in early 2002 with essentially a do-it-yourself-kit to be an IT security consulting firm. Incorporation on the cheap was fine at the time because Cryptine was a lifestyle business and the primary purposes of incorporation were tax shielding and the reduction of personal liabilities. I joined the team over the summer of 2003 and after working with Cryptine for about a year we realized there was an opportunity to automate many of the security services were delivering by hand with software. In December of 2004 we brought on our first two software developers and began working on the project.

      Over the next 10 months our software development took several twists but it was clear that we were on to something. It also became increasingly clear that while the consulting revenue had been supporting the software development, these were two separate businesses and that capital would be allocated more efficiently by separating them. Thus, in October of 2005 we sold our consulting assets to Helio Solutions, which amounted to a small seed investment and allowed the remaining team members to focus exclusively on software development. Yet, the sale to Helio Solutions represented a major change to Cryptine Networks structure and team, which ultimately led to our recent failure.

      Major Progress on the Software Business

      Between October of 2005 and May of 2006 we made significant strides in our software development and were ready to release our first product this summer. Also, we had put together a list of 12 beta partners that included 3 publicly listed companies (two of which were in the Fortune 1000) and 2 additional very famous/recognizable/influential brands with in the high-tech community. Furthermore, we had just recently received our first purchase order and while it wasn’t a huge check, it was a compelling demonstration that our customer/beta traction was leading somewhere. As I’ve mentioned before, customer traction is a great way to get investor’s attention. As such, we had 3 institutional investors following up with us (but to be fair no term sheets yet) and we had 3 angel investors who had also expressed an interest in investing if a round came together. Suffice it to say that it looked like things were about to get pretty interesting.

      Trouble Redistributing Equity

      However, as investors became more interested it was clear that we need to rework Cryptine Networks structure and equity distribution from that of a lifestyle business to something venture fundable. Unfortunately, this became a struggle between the team members who left Cryptine when we sold our consulting assets to Helio Solutions and those that continued to work on the software development project.

      At the time of the sale, we had a discussion about the leaving founders giving back ownership and control to be redistributed amongst the current team members, future employees and (hopefully) the next investors. It was clear that we weren’t going get anything done at that time but it was just days after the sale and it was hard for both sides to see that what if any role the former founders would play in the software business. In part wanting to avoid the difficult negotiation and somewhat blinded by the optimism surrounding the Helio sale, I made the major mistake of coming to the following agreement. We agreed that the goal was to create a capitalization table that allow Cryptine to be venture fundable but we couldn’t agree on exactly what the appropriate numbers were for founders who were leaving the company at such an early-stage. Thus, we decided the leaving founders would retain X% of company ownership but with the understanding that the next investor would cram them down and that they wouldn’t endanger the financing by fighting the dilution too hard.

      This agreement allowed Cryptine to move forward but it was a huge mistake on my part for two primary reasons. First, cramming a founder down is difficult and can have legal ramifications. No investor had any interested in doing my dirty work and our expectation that they would was a healthy dose of wishful thinking. Second, the longer that we waited to finalize the agreement the harder it became. This was bad psychology on my part because the longer our resting agreement was in place the more it felt like a final agreement to the leaving party and the more entrenched they became. While on the other side of the fence those still at the company felt it was increasingly obvious that those leaving were no longer contributing to the software project. In essence both parties dug their heels in a little bit deeper each day and unfortunately we wound up concluding that it was not possible to move forward with an agreement about equity redistribution.

      Deadlocked Board of Directors

      Everyone involved in this decision was highly intelligent and rational but ultimately shutting down Cryptine Networks was a totally irrational decision that benefited no one, which highlights a second problem. Cryptine’s do-it-yourself incorporation did not create an efficient board of directors so there were no outsiders to add objectivity to the negotiation and the board couldn’t break the deadlock.

      Some suggested using the highly aggressive tactic of simply issuing more shares to dilute the leaving founders to more appropriate levels. I don’t know if I would recommend this course of action to because share holders rights are highly protected, which can cause legal problems down the road. Furthermore, it is a bridge burning tactic and I try to avoid burning bridges unless it is truly a last resort. Yet, regardless of my own reluctance the threat of forced dilution would have provided leverage in the negotiation and might have led to a different outcome. However, forced dilution wasn’t an option because our board of directors was deadlocked. If we had created our corporate structure with the guidance of an experienced corporate attorney s/he would have seen this problem coming a mile a way, which would have kept more options open and possibly saved the company.

      Two Key Lessons

      I believe there are two key lessons to be learned from Cryptine Network’s demise. First, all stock should be on a vesting schedule from day one. Equity is a key resource for startups. Equity is used to attract capital and is a major part of employee compensation packages. Thus, it is very important that startups are as efficient with their equity distribution as they are with their capital. Stocked owned by anyone who isn’t contributing to the companies success represents dead weight, which means there is less in the pot to attract new investors and team members.

      No matter how close of friends, how much you trust each other or how good your intentions are money comes between people and everyone over estimates their own contributions. Furthermore, founders become highly emotional about their companies. Thus, the process of negotiating taking back stock from founders is not rational and inherently very difficult. However, vesting schedules reduce the difficult negotiation to simply and mechanically exercising the companies pre-agreed right to repurchase stock at the price it was issued. I foolishly let myself fall into the “it won’t happen to me” trap but no startup gets it right on the first try and theses hiccups often lead to changes in the team. Believing that any startup won’t have to deal with stock vesting issues is totally unrealistic.

      Typical startup vesting schedules last 36-48 months and include a 12 month cliff. The cliff represents the period of time which the person must work for the company in order to leave with any ownership and the vesting schedule represents what percentage of stock the company can buy back at the time of departure. For example on a 48 month vesting schedule with a 12 month cliff, if an employee is offered 1000 shares but leaves in the first 12 months they don’t keep any equity. However, if they leave after 26 months they get to keep 26/48 of the equity promised or 542 or the 1000 shares. Key team members leaving will always be difficult but using a vesting schedule can make one acrimonious aspect of their departure much easier.

      The second key lesson is that boards are most effective when they have 3 or 5 voting members and include at least one objective outsider to break any deadlocks. Early-stage startups are probably better suited with 3 directors than 5 so that the entrepreneur(s) can focus on building their company without getting bogged down managing their boards. My experience suggests that 3 is a good number even for bootstrapped companies that haven’t yet raised capital. Upon raising capital the investor will likely want a board seat so one of the board members needs to be ready to resign. In fact, it is a good idea to get an undated, pre-signed letter of resignation that says something like…

      “Due to the XYZ Corp’s recent financing, I will be resigning in order for the new investor to take my seat.”
      …from the departing board member to ensure that everyone is on the same page and smooth the transition.

      One Last Lesson

      For myself and everyone involved, Cryptine Networks will always be a painful memory for having come so close and failed under seemingly preventable circumstances. At a minimum, given the salaries forgone, time, blood, sweat and tears that we all invested in Cryptine, everyone would have been better off, even with the same outcome, if we had come to these conclusions the day we sold our consulting assets.


      *I am not a lawyer and none of this posting is legal advice. If you are seeking legal advice about startup issues I recommend speaking with Fred Greguras, Barry Carr or Greg Pickrell.

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