Posts from March 2018

Founder Vesting

Founder vesting is when founders agree that their founder’s stock will vest over some period of time, normally four years.

Many times we will come across a company that we might want to invest in and when we look into the cap table and documents, we see that the founders were granted their shares with no vesting. In those situations, we will insist that the founders vest their shares as part of a financing we do, usually Seed but sometimes Series A.

The point of founder vesting is that it is not fair to the rest of the shareholders, particularly the other founders, if one founder leaves early on in the life of a startup. I have seen situations where this has happened and its very problematic. One or more founders continue to work at the company while one or more founders leave but keep all of their founder’s stock. It creates all sorts of problems for the remaining founders and shareholders.

So the answer to this is to put a founder vesting provision into the formation documents when the founders stock is issued. Or if that wasn’t done, to fix it by putting vesting onto the founders shares when a seed or some other financing round is done.

It is typical that all founders will have accelerated vesting of their founders shares in the event of a sale of the company. If the buyer wants them to stay past the sale transaction, they can address the founders equity in the sale transaction in various ways.

It is also typical, but not often agreed upon up front, that a founder who is asked to leave, would get some additional vesting on their founders stock as part of a separation agreement. Full vesting is rare unless the founder is leaving late in their vesting term. But some additional vesting is pretty common in a forced departure.

If you and your co-founders do not have vesting on your founders stock, you should fix that. If you do a financing with a sophisticated angel investor or venture capital firm, you will be required to fix it as part of the investment deal.

#entrepreneurship

Audio Of The Week: Skin In The Game

I have been listening to Nassim Nicholas Taleb‘s new book, Skin In The Game, in audiobook form while driving around LA this past week. I’ve always been a fan of having skin in the game and others having skin in the game and so it’s a topic that makes a lot of sense to me.

I happened upon this podcast between Russell Roberts and Nassim and it’s a pretty good summary of many of the important topics in the book. So if you don’t have time to read or listen to the entire book, this podcast is an excellent short cut to some important concepts.

#economics

Nothing Is "Standard"

I told this story last night at dinner to the Gotham Gal (who has heard it many times) and two friends who are in the investment business. They loved it.

I’ve blogged it before, but it has been almost ten years since I’ve told it here.

So I am going to share it with all of you this morning:

I woke up thinking about Morty this morning. I haven’t seen or heard from him in over ten years. But Morty taught me one of the most important lessons about negotiating that I’ve ever learned.

Morty was Isaak’s partner in Multex early on. They put up the initial money to get it started. Morty wasn’t a venture guy. He was a real estate lawyer and sometime real estate investor. He was as conservative as you can get and never liked the startup/venture business. But he was Isaak’s partner. And Isaak asked Morty to negotiate the term sheet for the seed round with me.

This was late 1992 and I’d been in the venture business for five years and was on my second or third deal on my own. I’d negotiated a bunch of term sheets by that point, but I’d never had a negotiation like the one I was in for with Morty. Actually I don’t think I’ve ever had one as rough as that since.

Morty wasn’t familiar with venture terms. They didn’t make sense to him. So standing in an airport pay phone (before cell phones) I went line by line, term by term with Morty.

We got to redemption and he started in. “Why do you need this provision Fred?“. I was getting tired of his non stop push back and blurted out “Because it’s standard. We always get this provision. Always have, and always will“.

That got Morty pissed. He shouted over the phone:

I don’t give a f>>>k that you always get this provision. Doesn’t mean shit to me. This deal will be the first time you don’t get it if you don’t explain why you need it.

That set me back on my heels and I weakly explained that if the deal goes sideways for years, we need some way to get out of the deal and redemption provides that path. I don’t even remember if he bought that argument. But I do know that we had redemption in the Series A at Multex and pretty much every deal I’ve ever done.

But the point Morty made rang true to me and I’ve lived by his rule ever since. I never ever say that a specific provision is “standard”. Nothing is standard. You either need it or you don’t. Explain why you need it and most of the time you’ll get it or something like it as long as both sides really want to make a deal.

#life lessons

Coinbase Index And Coinbase Index Fund

First a disclosure for all the disclosure enthusiasts who hound me here and on Twitter to disclose things that are well known to most readers in hopes of turning this blog into a legal document: USV is a large investor in Coinbase and I am on the Board of Coinbase.

Ok, now that we have done that part, here’s the news that came out yesterday and I want to talk about today.

Coinbase launched an index and an index fund yesterday:

The Coinbase Index is a measure of the financial performance of all assets listed on Coinbase’s GDAX exchange, weighted by their market capitalization.

And the Coinbase Index Fund is a way to buy that index without having to buy the individual assets that make up the index.

This blog post has more details on both.

To start, the Coinbase Index Fund will only be available to US-resident, accredited investors. Coinbase is actively working on launching more funds which will be available to all investors and cover a broader range of digital assets.

To me, this is all about broadening the appeal of crypto tokens to a wider range of investors than are currently in the market. Making it simple for the average investor to get exposure to this emerging sector is a good thing and I am pleased that Coinbase is broadening its offerings to reach people it is currently not serving.

#blockchain#crypto

Bird Scooters

Everywhere I look on the west side of Los Angeles, I see Bird Scooters.

These are electric scooters you can rent from your mobile phone.

They look like this:

I finally got around to taking a ride on a Bird today.

After you download the app on your phone, you snap a picture of your credit card and your drivers license and sign a waiver, all on your phone, and you are good to go.

Then the app shows you where there are available Birds near you. That looks like this.

When you click the Ride button, the app asks you to scan the Bird’s QR code, which looks like this:

And then off you go.

My friend David snapped these photos of me arriving for our meeting.

It was a lot of fun.

I plan to ride them a bunch more while we are in LA this month.

#Blogging On The Road

Twitter TV Ad

I believe the ad Twitter ran at the Oscars last night is their first TV ad.

If so, I am a fan.

It was an anchor to a hashtag conversation and took on a topic of cultural relevance.

It speaks to the power of Twitter to be a force for good in the world.

I understand that Twitter is used by all sorts of bad people and for all sorts of bad things.

That is the challenge of operating a real-time, open, global communication system.

But it is also true that Twitter is used by all sorts of good people and for all sorts of good things.

And the ad reminded me and everyone of that last night.

Disclosure: My wife and I are long TWTR.

#Current Affairs

Pay Attention To The Package

Tech investing is a lot about big trends and timing them.

We knew mobile was going to be a game changer as far back as the mid 90s, but it didn’t really take off until the iPhone came along in 2007

We knew personal computing was going to be a big deal in the late 70s, but computers didn’t become truly personal until operating systems got graphical user interfaces in the mid 80s.

The internet was super interesting in the late 80s and early 90s but it didn’t go mainstream until we had web browsers in the mid 90s.

Artificial intelligence has been around as a computer science effort for sixty years but it didn’t start impacting our every day experiences until it was packaged up (and effectively made to disappear) in web and mobile apps and increasingly cars and voice activated devices.

My point is that technologies present themselves as interesting investment opportunities long before they go mainstream and figuring out when they are going to go mainstream is a lot about looking for the right packaging.

Virtual and augmented reality has been an interesting and investable technology for the last six or seven years. But it hasn’t gone mainstream yet because the packaging of the technology remains problematic. At some point, some company will figure out how to package it up correctly and it will go mainstream. Until that happens, it is a difficult place to make money, even though a few entrepreneurs and investors have been able to do that.

Blockchain and crypto is in a similar state. Today, other than buying and selling crypto tokens, blockchain applications are clunky and hard to use. Centralized applications are way better than their decentralized cousins. When entrepreneurs figure out how to package up blockchain applications so that they are fun and easy to use, I think we will see them take off. My guess is that it will happen first in gaming and collectibles.

My point is that it is one thing to develop a technology that is superior to the current offerings, but entirely another thing to make it usable by most people. The first part is, in some ways, the more important thing (like Satoshi’s white paper) but the second thing is often where the investment leverage happens.

#VC & Technology