The Post Money Value

A Fatal Paper Cut

Last week I watched, live, a promising young start up die because of pesky paperwork and a VC that felt the need to go the distance when it came to covering thy butt. It was ugly and it will be nothing shy of a miracle if the lawsuits don't come flying. 

[cue the Dragnet Theme]

The story you are about to read is true, only the names have been changed to protect the innocent.  Okay, to protect the stupid, greedy, and confused as well.

Start Up is rocking along with a little service.  Has paying customers, solving a problem, but is in expansion mode, running out of credit cards/mortgage to pay the bills.  In fact, hosting facility, etc, are all pounding on the door looking for payments.

A VC offers up a term sheet, does due diligence, and decides, yep, we're in, let's go to legals.  The terms are negotiated, everybody appears happy, capital is ready to transfer.

VC lawyers offer up the shareholders agreement as one of the documents that needs to get signed off by all the shareholders.  No problem. Well, almost no problem.  Turns out that when the friends and family round was being done, lots of shares were handed out to lots of people for help.  A little code help? Here, have some shares.  Dropping a pizza by? Here, have some shares.  Some cash? Bless you, here, have some shares.   You get the point. All told, 42 shareholders which owned 22% of the company.  42 people spread out over three countries.  42 signatures required.  And, as fate would have it 21 missing shareholders.  Moved, not returning phone calls, no emails, etc.

The VC refused to close without the signatures and, to make a long (painful) story short, the company died for lack of funding.

There are a few lessons inside of this train wreck but here is the big one I'd like to point out.

Shareholders agreement, minority rights and voting trusts are things you need to learn about before you give out the first share of your company.

The most important thing you can do is create a voting trust/minority shareholders agreement for all these 100 share or 1000 share things you will likely do in exchange for services or cash.  Most people that help a start up are generally doing it to help you, to be nice, not looking for the retirement investment.  They are taking a bit of a flyer on you.  Toward that end, those people are about as passive as you can get.  They should have no problem signing up for a structure that basically has them along for the ride.  I'm not a lawyer so in non-legal terms you need to have an agreement in place that accomplishes these objectives:

• Prevents you chasing around the globe for shareholder signatures.
• Puts the minority shareholders in a voting trust
• Has a specific agreement that clearly identifies the rights/privileges  of the minority shareholders.

To accomplish this, draw up a voting trust for everybody who has less than a certain percentage of share ownership. You can use less than 10% or whatever number but spell it out and ensure the language is clear and reviewed by a qualified lawyer.  In some jurisdictions, you can't contract out of certain rights, so ensure you know what you can/can't do with respect to voting, etc, where you form up the company.

Also, ensure that things like shareholders meetings, participation rights, etc, are specifically spelled out in the minority shareholders agreement.  With a voting trust of all the minority shareholders in place, you can vote/sign/represent them, you can spell out that notifications for meeting go to the trustee and -as an example- the trustee can waive notice.   That for example, makes sure that if you have to call a shareholders meeting you can do it on a moments notices, without a waiting period, etc, etc. 

Signature requirements and notification requirements also need to be spelled out so that when you sell the company and some random person with 1000 shares goes missing, the sale doesn't die.

One thing you, as the founder, should consider as a back up or comfort for the VC is an agreement that basically says if there is a problem with a shareholder (like your Uncle Ned), you are responsible for the financial risk.  If Uncle Ned screams that he should have been able to buy more shares or whatever, any resulting payments to Ned is your problem.  This can sometimes prevent the deal from being held up waiting for a random signature.  For some, this will be enough comfort, for others (see above), it won't be.

The point I'm making here, folks, is don't go to the office supply store and buy those fill in the blank shareholder agreements and stock certificates.  Make sure when you start, you start with the structure that will allow you to take professional money sometime in the future. 

The company you save, may be your own.

The Great Blog vs. Journalism Debate

I'm on the redeye back to Toronto from LA. While sitting here in the terminal, I've been catching up on some blogs and news.

I'm a fan of Jeff Jarvis for many reasons. Mostly because, as a nobody, I happened to be at a place where he was talking, got a chance to meet him and he treated me to a respectful conversation about what had just transpired on the panel. Genune guy, none of the pompous behavior that so often accompanies the famous ones.

Anyway, Jeff tends to pound the snot out of "old media" and over the years, I've gotten more in tune with this debate.

So, consider this. 

There is a reporter for the Associated Press named Matt Sedensky who is covering the Anne Nicole Smith happenings.  In a story, there was this clip about Smith's mother:

"said Arthur, a heavyset woman with bleached blond hair."

As I started looking at this story, there was the 'estranged mother' description put in as well.  Other journalists were doing much the same but Matt hit the bleached blond high watermark reporting point.

Then I wandered around blog-o-land for some stories and, gee, I couldn't find one blogger who was covering the trial, summerizing the day's events, etc, that said anything about Ms. Arthur's physical appearance. In point of fact, the bloggers were 'reporting' the facts from the perspective of saying he said this, then the judge asked that, to which she said whatever.  No hair shots.

I suspect Matt would defend this by saying he was adding color, so you could be there, etc, etc, but in the end, in my view, those that wanted to find out what transpired over the past few days, were way way better served by the commentary of the blogging community and the 'reporting' that was happening.

I've got an upcoming -and very much anticipated- meeting with Len Brody, CEO of NowPublic.

Thanks, Jeff, for giving me lots of background on this topic via you blog/rants/columns.

Pass the Bandwidth Please

I'll leave it to the experts to slice and dice up JetBlue's disaster last year, I fly em with carry on and only on southern routes during the winter.  In addition, the mail order prisoner of war training course I took, showed me how to fake various medical -and mental- conditions so I'm not getting stuck on a plane for 10 hours.

While nightmare at JFK is still sorting itself out, JetBlue is basically begging people to stay off the phones and use the website.

uh huh...

"Data lines may be congested..."  "contact Reservations"

A Few Stats for you to Noodle on

For those of you keeping score at home, here are some interesting stats pulled from the start up folks I've been meeting with under the no harm/no foul rule.

• Total 'no harm/no foul' meetings to date: 93
• Percentage of .net vs. java based solutions: 40% .net 60% Java
• Number of presentations/demos done on a Mac: 21
• Number of NDA requests: 18
• Number of NDAs signed: 0
• Number of Presentations done anyway without the NDA: 18

The average seed ask was 2.7 million dollars designed to get the company an average of 20 months, product beta/launch, WoM marketing, will the dogs eat it determination.

65% (aprox) of these no harm/no foul meetings were with people who had full time jobs and this was being done out of the basement.  The others were credit cards, kids education fund, home mortgage, etc.  In virtually all cases, nobody was taking a salary for the seed.

On average, co-founders showed up in the vast majority of cases, i.e. it was two (or more) and not the lone wolf being the majority of what I've been seeing.

22 women founders/co-founders, woohoo, I'm the proud Dad of two daughters and PhD wife so, this was great to see.

The call remains the same, now is a great time to work on that idea, start up that company, and take the shot.

Getting Keyboards on the Beach

Some people never leave home without American Express. I prefer to always carry Netgear Wireless Hub products with me and cash for everything else.

If you've wondered about Ethernet over power, here is the current set up I have and how I got it.

I've got an Internet connection in the cottage.  I have this beach and a really nice shade tree with my name on it.

Enter a construction type extension cord.  I run this from an outside plug along side the property fence line right to the beach. Plug in the Netgear equipment and, presto, keyboards on the beach.

The cord is probably 500 feet along the property line I suspect passing boats can get a bit of an Internet fix.

Some light blogging this week

I'm on the road (beach actually) in St. Martin with my trusty blackberry. I'm doing what I can to think great blogging thoughts but generally staring into space seems to be the order of the day.

Stay tuned.

Lights, Camera, Money

If you are looking to get an elevator pitch filmed by some professionals for free, I've got a deal for you.

The CBC will  be at the Toronto Venture Group's breakfast on Feb14th (this week) with a camera crew.  If you want to get a shot at the Canadian Version of Dragon's Den (<$1,000,000) or a shot to pitch at the Canadian Venture Forum (>$1,000,000), you can come by, get taped and let the CBC and Rogers people do the rest by getting your entry into the Pitch4Profit currently going on.

The details about the contest can be found here.

The details about the breakfast this week can be found here. The Venture Forum information is on that home page as well.

Wednesday, folks, don't miss the opportunity, you never know.

IMIFIED = Making the Money Point

On February 3rd, a couple of guys (Dave and Anthony) said the following on a blog:

"4 months, a few bucks, and a couple cases of Redbull later, Imified is finally open!"

Imified is basically a service where you use your IM client to do all kinds of things for you without, for example, logging into your Google Calendar application.

What they say:

"WHY SHOULD I USE IT?

Because you shouldn't have to launch your browser to add a new appointment to your Google calendar, or complete a todo in your backpack account. Imified is always open, sitting right there in your favorite IM client ready to help. If you have an IM client running on your mobile phone, you've got instant access to your applications wherever and whenever. Cool huh?"

 

Is is just another feature? Will it require zillions of dollars to get to scale? Will it make money? Will it sell to the MYGA junta? (Microsoft, Yahoo, Google, AOL)

Doesn't matter for the purposes of making my start up point.

Go code something. Go solve a problem.

There has never been a better time to take a shot

Chris Pirillo - Back to the Future

For many many years, I've been a fan of Chris Pirillo and all that is Lockergnome.  Over the years, Chris has done some amazing things, like the Gnomedex conference, to provide all of us with news, insights, and fun with respect to technology.

One of the things that I (among the thousands of others) used to love was that Lockergnome email filled with links, tips, tricks, etc.

We got all fancy with RSS, DLL, and ABCs with simple Lockergnome emails fading away.

Back to the future, Chris has returned with his simple daily dose of what's interesting out there.  If you'd like to start -or depending on time zone end- your day with Chris and his tasty nuggets of information, you can sign up for the at: picks@lockergnome.com.  You can see what you've missed here. And, of course, the live feed is here.

Chris Pirillo continues to be one of my favorite good guys and I can't say enough good things about him and his work.  It's great to have an original back.

Well done, Chris.

CNN - Ouch

Is it just me or is this line, from the CNN story about you know what,  a bit like chalk on a chalkboard

"As a condition of her release, Nowak was ordered to wear a global positioning satellite device, known as a GPS."

I'm a bit surprised the reporter would dumb it down to this point but maybe I shouldn't be given there are still, at last report, about a couple of million bucks a month being ripped off by all the widows of various African rulers.

On the other hand, who says Google owns it all?

"Inside the car, police found an a half dozen latex gloves, MapQuest directions from Houston to Orlando International Airport..."

MapQuest, the official mapping software of NASA.

(okay, bad taste, back to VC stuff...)

Social Media - Wish I'd Said That

I've mentioned the website In Pictures before. This is the company doing a whole bunch of free online tutorials across a variety of topics.  Chris Charuhas, the founder had sent me an update on the excellent page view growth.  Inside the email, Chris made what I believe is an excellent comment with respect to how the Internet and how the Web is evolving:

"With the rise of social networking and blogs, what matters most on the Web is not a big, rich company saying, "Buy This," but a lot of regular folks saying, 'Try this.'"

Excellent.  I'd urge you to check out the work Chris has done especially if you are working with school system that are lacking funds for online/computer training materials.  Chris has worked with developing nations and schools around the world using FTP and good old sneaker net to get useful material into the hands of educators worldwide.

Well done, Chris, well done.

The Title Trap

Fred Wilson has a good observation about founders, mentioning Reid Hoffman's hiring of a CEO for LinkedIn.

Fred's commentary on VentureBeat's using the phrase "stepping down" versus his view of stepping up to Chair is worth reading.

"I'd like to suggest a new word to describe what really happened. Reid 'stepped up' to the role of chairman."

These days, I've spent countless hours with start ups and founders who have jumped all over the CEO (or President and CEO) title as a goal unto itself.  What's problematic is getting trapped into this notion that titles drive the business. 

Titles do not drive businesses, founders with vision, drive, and passion do.

The single most important thing you can do in order to make your business a reality, is to get smarter people than you working on the problem while you drive the vision.  

Be the founder and avoid the title trap.