Posts from entrepreneurship

The Bitcoin Hype Cycle

Most people are familiar with the Gartner Hype Cycle. It is a great framework for looking at the development of important technological innovations:

Hype-cycle

It is interesting to look at the price chart of Bitcoin in this context:

btc prices since jan 2012

It sure feels like we’ve been through the technology trigger phase, the inflated expectations phase, and are now well into the trough of disillusionment phase.

What’s more interesting is the question of what will lead us onto the slope of enlightenment? I am thinking that we will start to see native applications of Bitcoin. These would be things that simply could not exist without this technology. Donating money to charity with Bitcoin is awesome, and I do it regularly, but it is not a native application of Bitcoin.

I plan to write more about these native applications because I think they are the key to getting to the next phase in the Bitcoin adoption cycle.

Reblog: Minimum Viable Personality

There are two guest posts that are essentially tied for the most popular guest post ever on AVC. They are both in the top ten of all posts on AVC since I put Google Analytics on this blog at the start of 2007. They each have seen about 125,000 page views since they were published.

The first is Joel Spolsky‘s guest post on The Management Team.

The second is this post below from Fake Grimlock.

Both are great, but I felt like putting some dino magic on the blog today.

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MINIMUM VIABLE PERSONALITY

MOST IMPORTANT STEP FOR BUILD PRODUCT IS BUILD PRODUCT.

SECOND MOST IMPORTANT IS BUILD PERSONALITY FOR PRODUCT.

NO HAVE PERSONALITY? PRODUCT BORING, NO ONE WANT.

BREADORBACON

 

PERSONALITY BETTER THAN MARKETING

WHEN CHOOSE PRODUCT, HUMANS ONLY CARE ABOUT DOES WORK, AND IS INTERESTING.

WORLD ALREADY FULL OF THINGS DO WORK. MOST BORING.

PERSONALITY = INTERESTING. INTERESTING = CARE. CARE = TALK. 

EVERYONE CARE AND TALK ABOUT PRODUCT? YOU WIN.

CAREPLUSTALKISWIN

SELL TO FRIENDS, NOT STRANGERS

PERSONALITY MAKE PRODUCT FRIEND. YOU HELP FRIEND. YOU FORGIVE WHEN FRIEND NOT PERFECT. YOU WANT FRIEND WIN.

BORING STRANGER?… YOU NOT.

PERSONALITY IS API FOR LOYALTY. NO ONE CARE WHICH BORING STRANGER IS NEXT. BUT ALWAYS WANT FRIEND NEXT. 

LOYALTYPORT

PERSONALITY MAKE MEANING

CAN PET ROCK. PET DOG BETTER. PET DOG HAVE MEANING.

BORING PRODUCT IS ROCK. NO HAVE MEANING. INTERACT WITH PERSONALITY DIFFERENT. HAVE MEANING.

INTERESTING PRODUCT THAT GIVE FRIENDS MEANING = MOST WIN OF ALL.

NOTAROCK

HOW NOT BE BORING

HAVE PERSONALITY EASY. ANSWER THREE QUESTIONS:

1. HOW YOU CHANGE CUSTOMER’S LIFE? 

2. WHAT YOU STAND FOR?

3. WHO OR WHAT YOU HATE?

NOW HAVE MISSION, VALUES, ENEMY. THAT ENOUGH FOR MINIMUM VIABLE PERSONALITY.

KEEP IN BRAIN WHEN WRITE, TALK, BLOG, TWEET. ITERATE. IMPROVE WHAT WORK. DELETE WHAT NOT. PERSONALITY GROW.

NO BE CHICKEN

CHICKEN LIVE IN CAGE. NO CAN HAVE PERSONALITY INSIDE CAGE. 

LAST STEP IS SMASH CAGE, LIGHT BARN ON FIRE.

DO THAT, YOU WIN.

CHICKENWIN

Reblog: Employee Equity: How Much

This may be the most popular AVC post of all time based on the amount of traffic it gets month after month after month. I think I may rewrite it at some point because while I still believe the basic ideas here are correct, some of the math has changed due to market pressures and it deserves a rewrite. With that caveat, here it is.

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The most common comment in the long and complicated MBA Mondays series on Employee Equity is the question of how much equity should you grant when you make a hire. I am going to try to address that question in this post.

First, a caveat. For your first key hires, three, five, maybe as much as ten, you will probably not be able to use any kind of formula. Getting someone to join your dream before it is much of anything is an art not a science. And the amount of equity you need to grant to accomplish these hires is also an art and most certainly not a science. However, a rule of thumb for those first few hires is that you will be granting them in terms of points of equity (ie 1%, 2%, 5%, 10%). To be clear, these are hires we are talking about, not co-founders. Co-founders are an entirely different discussion and I am not talking about them in this post.

Once you have assembled a core team that is operating the business, you need to move from art to science in terms of granting employee equity. And most importantly you need to move away from points of equity to the dollar value of equity. Giving out equity in terms of points is very expensive and you need to move away from it as soon as it is reasonable to do so.

We have developed a formula that we like to use for this purpose. I got this formula from a big compensation consulting firm. We hired them to advise a company I was on the board of that was going public a long time ago. I’ve modified it in a few places to simplify it. But it is based on a common practive in compensation consulting. And it is based on the dollar value of equity.

The first thing you do is you figure out how valuable your company is (we call this “best value”). This is NOT your 409a valuation (we call that “fair value”). This “best value” can be the valuation on the last round of financing. Or it can be a recent offer to buy your company that you turned down. Or it can be the discounted value of future cash flows. Or it can be a public market comp analysis. Whatever approach you use, it should be the value of your company that you would sell or finance your business at right now. Let’s say the number is $25mm. This is an important data point for this effort. The other important data point is the number of fully diluted shares. Let’s say that is 10mm shares outstanding.

The second thing you do is break up your org chart into brackets. There is no bracket  for the CEO and COO. Grants for CEOs and COOs should and will be made by the Board. The first bracket is the senior management team; the CFO, Chief Revenue Officer/VP Sales, Chief Marketing Officer/VP Marketing, Chief Product Officer/VP Product, CTO, VP Eng, Chief People Officer/VP HR, General Counsel, and anyone else on the senior team. The second bracket is Director level managers and key people (engineering and design superstars for sure). The third bracket are employees who are in the key functions like engineering, product, marketing, etc. And the fourth bracket are employees who are not in key functions. This could include reception, clerical employees, etc.

When you have the brackets set up, you put a multiplier next to them. There are no hard and fast rules on multipliers. You can also have many more brackets than four. I am sticking with four brackets to make this post simple. Here are our default brackets:

Senior Team: 0.5x

Director Level: 0.25x

Key Functions: 0.1x

All Others: 0.05x

Then you multiply the employee’s base salary by the multiplier to get to a dollar value of equity. Let’s say your VP Product is making $175k per year. Then the dollar value of equity you offer them is 0.5 x $175k, which is equal to $87.5k. Let’s say a director level product person is making $125k. Then the dollar value of equity you offer them is 0.25 x $125k which is equal to $31.25k.

Then you divide the dollar value of equity by the “best value” of your business and multiply the result by the number of fully diluted shares outstanding to get the grant amount. We said that the business was worth $25mm and there are 10mm shares outstanding. So the VP Product gets an equity grant of ((87.5k/25mm)  * 10mm) which is 35k shares. And the the director level product person gets an equity grant of ((31.25k/25mm) *10mm) which is 12.5k shares.

Another, possibly simpler, way to do this is to use the current share price. You get that by dividing the best value of your company ($25mm) by the fully diluted shares outstanding (10mm). In this case, it would be $2.50 per share. Then you simply divide the dollar value of equity by the current share price. You’ll get the same numbers and it is easier to explain and understand.

The key thing is to communicate the equity grant in dollar values, not in percentage of the company. Startups should be able to dramatically increase the value of their equity over the four years a stock grant vests. We expect our companies to be able to increase in value three to five times over a four year period. So a grant with a value of $125k could be worth $400k to $600k over the time period it vests. And of course, there is always the possiblilty of a breakout that increases 10x over that time. Talking about grants in dollar values emphasizes that equity aligns interests around increasing the value of the company and makes it tangible to the employees.

When you are doing retention grants, I like to use the same formula but divide the dollar value of the retention grant by two to reflect that they are being made every two years. That means the the unvested equity at the time of the retention grant should be roughly equal to the dollar value of unvested equity at the time of the initial grant.

We have a very sophisticated spreadsheet that Andrew Parker built that lays all of this out for current employees and future hires. We share it with our portfolio companies but I do not want to post it here because it is very complicated and requires someone to hand hold the users. And this blog doesn’t come with end user support.

I hope this methodology makes sense to all of you and helps answer the question of “how much?”. Issuing equity to employees does not have to be an art form, particularly once the company has grown into a real business and is scaling up. Using a methodology, whether it is this one or some other one, is a good practice to promote fairness and rigor in a very important part of the compensation scheme.

Next Wednesday Is The Internet Slowdown

We’ve talked a lot here at AVC about Net Neutrality. I hate that term because it’s got so much baggage now that it is essentially meaningless to me. What I want to see is a framework that everyone agrees to (application developers, bandwidth providers, last mile access providers, and the regulators) that says you can’t prioritize one bit over another in the last mile access network and you can’t charge application developers to deliver their bits to the end user.

This issue is coming to a head at the FCC as the comment period is ending and some sort of decision will be made this fall. So next Wednesday, September 10th, is the Internet’s opportunity to stand up and be heard.

If you are with me on this issue, please consider joining the Internet Slowdown campaign next Wednesday. There are all sorts of ways you can do this. You can change your avatars on your social media profiles, you can send push notifications if you operate a mobile app, you can put a slow loading graphic on your blog or website (there are WordPress widgets if you are on WordPress like I am).

And if you still aren’t convinced, please read Chad Dickerson’s piece in Wired this week on why this issue is important to businesses and everyone who uses the Internet to reach their customers and/or audience.

Dream, Girl

For the past four years, The Gotham Gal and her friend Nancy Hechinger have been running a conference called The Women’s Entrepreneur Festival. The goal of the conference is to showcase successful women entrepreneurs to other women. As Marian Wright Edelman famously said, “You Can’t Be What You Can’t See.”

But even as The Women’s Entrepreneur Festival gets bigger and bigger each year, it can never scale to reach all women who might want to be an entrepreneur and it certainly can’t reach young girls who might be inspired to become entrepreneurs.

So that’s why I backed Dream, Girl this morning after seeing this Gotham Gal tweet:

Here’s the Kickstarter video:

I hope you’ll be inclined to back this project as well after reading this blog post.

Firebase

Last year, USV invested in FirebaseAlbert wrote a blog post about Firebase back when we invested.

Yesterday Firebase announced a hosted version of their product so you don’t have to use it alongside S3 or some other host.

I wandered by Hacker News to see what the developer crowd thought about Firebase and the new hosting service and was pleasantly surprised to see one of the most positive threads on Hacker News that I have seen in a long time.

The top voted comment describes the power of Firebase really well:

I’ve been using Firebase for a couple of months now for an iOS app I’m building for a client, and it has been a fantastic experience.

For anyone who doesn’t know, it’s main selling point is that it automatically syncs with the server so you can focus on the data instead of the communication protocol or replication. Its nosql data store looks like a local filesystem, so you can save trees of data to it as JSON. It also has server-side rules written in javascript that enforce constraints on data and read/write permissions per user. They also have a free test account for developers.

“What about merge conflicts?” was my first question, but luckily it has transactions on an individual node (and its subtree) that perform an “optimistic-concurrency transactional update” which basically means a compare-and-swap where you review the current value in a callback and decide whether to try to commit that value (or a new value, say, for a counter) or give up. For most other writes, you’re usually just saving status updates where there is little or no danger of being rejected or encountering merge conflicts. If in doubt, it’s possible to get a callback with the final value.

So when it’s all said and done, I can totally see writing a full-featured app using it without a single line of server-side code. I used their hosting while it was in development to store images (like a CDN) and it’s very simple to use from the console, so if you have a build script, it could push to production with a single call. After an exhausting ordeal battling iCloud for a different project, Firebase is so profoundly better that I will never go back.

That’s the kind of unsolicited customer testimonial that most companies would die for. It’s a real tribute to the Firebase team that they have built something that developers love. We have been involved with a few companies that make products developers love (Stack, Twilio, Mongo for example) and these have all been fantastic investments for us. Looks like its time to add Firebase to that list.

Dream It And Code It

A few months ago, I posted about a student coding contest called Dream It Code It Win It. I attended the awards contest last night at The Great Hall at Cooper Union. I love that space. You feel the history when you walk into the room.

The majority of the event was a panel event which in my opinion was a waste of time. I wanted to see the students present their projects. Which sadly did not happen. But the students were invited up onto the stage to collect their awards.

In the high school category, almost half of the participants were women. That is a fantastic stat and hopefully a sign of things to come with women and coding.

I was super excited to see a team from The Academy For Software Engineering win one of the awards. That is a great accomplishment for a school that hasn’t yet completed its second year. Here is the team from AFSE getting its award.

afse students

 

It was also really fantastic that The Young Women’s Leadership Academy (an all girls high school in NYC) fielded a winning team. I’ve heard great things about that school.

Not surprisingly Stuyvesant High School had three winning teams. The Stuyvesant CS program has been around for almost twenty years and its leader Mike Zamansky is one of the unsung heroes of the NYC tech scene.

Mike sent me videos last night after the event for the three winning teams from Stuy. One of them is so good, I think it would easily get funded on AngelList. It’s called Cartwheels (great name) and here’s the video.

These kids eat at food carts every day, they dreamed of a better way, they built it, and they won it. That’s awesome.

The Pied Piper Effect

I’ve said many times on this blog that I like to give away bitcoin. I have my Coinbase wallet on my phone (yet another great reason to use a phone that allows you to do what you want with it). I’ll be out at dinner with friends or wherever, and I will take out my phone and send some bitcoin to a friend. It is amazing to see the effect of owning bitcoin on people. They go from being dismissive to being fans pretty fast when they own some bitcoin.

So it was with great joy that I read that every MIT student (all 4,528 of them) is going to get $100 in bitcoin to use however they wish. This is like giving every MIT student a laptop thirty years ago. That didn’t happen, but I had to make some kind of comparison. I can’t imagine a better group of students to infect with bitcoin religion than the MIT students. This will encourage them to get into bitcoin, understand it, and build stuff on top of it.

I don’t know the two MIT students who are doing this, but I do know their largest funder. I have reached out to him this morning in hopes that I can join the funding group behind this bitcoin giveaway. It is awesome. I love it.

Options and Offer Letters

A CEO of one of our portfolio companies sent me a question about process in making offers and equity grants. I sent him a reply. And I thought, “this reply is a blog post”. So here is the reply with the specifics redacted. I hope folks will find this useful.

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It is a Board’s responsibility to approve all option grants. Most boards do this at the start of the Board Meeting. It is usually just a formality, but it is good governance to do that.

The management team obviously can’t wait for the Board Meetings to make offers. So most companies make offers that are contingent on board approval, but that approval is assumed that it is going to be there. Otherwise the management will be in a tough spot having made a promise they can’t keep.

What I generally suggest is that management have a standard options grant. It could be as simple as “everyone gets at least 1000 shares when they join, important role players get 5000 shares, directors get 10,000 shares, software engineers get 10,000 shares, senior software engineers get 20,000 shares, VPs get 50,000 shares. C level gets 100,000 shares”

I just made that up. You should make one that makes sense to you.

Then you get the Board to sign off on the standard grants. Then you can make offers with standard grants in them knowing that they will be approved.

If you want to go wildly off the standard grant for a special situation (relo, super star, etc), just shoot the board an email and get buy-in before making the offer. You will still want to get formal approval at the next Board Meeting.

I also suggest building an options budget. To do this you take your standard grant schedule, and then map it to your hiring and retention plan (I suggest granting options to current employees every two years as part of a retention plan) and then you will have an options budget for the next few years. That is a great thing to have.

For many of you, this is all obvious stuff. But you would be surprised how confusing all of this is to many entrepreneurs. So I figured I would put it out there.

Employee Equity: Too Little?

Sam Altman, who is now running YC, has a good post on employee equity that has been making the rounds this weekend.

He makes four observations about employee equity:

– employees don’t get enough

– the requirement to exercise quickly upon leaving is painful

– the tax treatment of options is closer to salary than stock

– companies don’t tell employees enough about their stock and related information

I generally agree with the latter three points. But I am not sold on the first point. We have seen some of our portfolio companies make very large grants to early employees and that ends up hurting the founder’s stake because investors factor all of the shares that have been issued into the valuation they offer.

This issue is getting particularly visible in silicon valley where the value of a top software engineer has risen considerably in recent years. Let’s say that you want to hire a top software engineer and are competing with equity grant offers from Facebook and Google where the value of the grant is $1mm. If you have a current valuation on your company of $10mm, then you have to offer 10% of the company to compete for that engineer. I am not saying the engineer isn’t worth it. She is. I am just pointing out how dilutive employee equity is becoming in silicon valley. We are seeing similar things happening in NYC and I imagine they are happening elsewhere.

Since I started in VC, the percentage of a company that non-founder employees owned was always in the 15-20% range after the team is fully built out. In recent years, I have seen that number creep up to the 20-25% range and if you extrapolate current trends out a few years, it could easily be 30%.

So I guess what I am saying is that this is a market we are participating in. And this market is becoming very competitive and a lot more transparent. The benefits of both of those things are accruing to the employees and they are getting more and more equity as a result. Sam may be looking in the rear view mirror with this first assertion. I think like many things, the market will take care of this problem. It already is.