I attended the MIT $50K Competition Final Awards Ceremony last night. The MIT $50K competition is one of the oldest entrepreneurship competitions in the country – it was started in 1990 well before the term “entrepreneurship” was mainstream. I was involved early on as a judge (from 1993 to 1998). Looking at the Alumni company list, it’s clear that 1995 was the year I was doing angel deals, as I became an investor in (and chairman of) NetGenesis and Thinkfish and fondly remember Firefly (Softbank ended up investing) and Silicon Spice (damn – that was a huge success). Webline was a big winner in 1996 (a Highland deal that Cisco acquired). 1998 saw two big companies emerge – Akamai (NASDAQ: AKAM) and Direct Hit (acquired by Ask Jeeves for $500m+).
The event last night was awesome. The MIT $50K has always been a student run event, which makes it both endearing as well as more powerful, as the MIT superstructure is part of the background as the students take center stage. The quality of the finalist teams (seven of them) was remarkable – much better then I remember from the mid-1990s. Interestingly, five of the finalists were life science deals (Balico, HealRight, Perviva, Tissue Vision, and Renal Diagnostics), one was a power technology deal (Nanocell Power), and one was a mech-e deal (Vacuum Excavation Technologies – it really sucked). I was really surprised to see ZERO-none-nada IT / software / Internet finalists (although there were plenty of IT-related companies in the field of 84 entries.)
The winner (and recipient of $30,000) was Balico – a medical device that helped people “balance” – their description from the web site is “Balico will develop and commercialize a wearable vibrotactile balance aid that accurately senses and displays body tilt in order to help prevent falls.” So – basically – if you have trouble balancing (you are old or have a balance disorder) wear the Balico “belt” and automatically stand upright. Very cool. The two runners up were Nanocell Power and Vacuum Excavation Technology – both recipients of the $10,000 award.
The two keynote speakers were past $50K entrants (but neither were winners). Tom Leighton – a co-founder of Akamai and a CSAIL professor of Applied Mathematics at MIT – spoke about how Akamai’s original business plan was fatally flawed, they lost the $50K competition (he speculated that they came in last), but then spent the summer working with Battery Ventures to figure out what a real business might look like (which of course – went on to a huge IPO, then crashed, and finally emerged as a sustainable, profitable business – $58m of revenue and $14.5m of net income in Q105 with a $1.5 billion market cap.) David Edwards – a co-founder of AIR and a Professor of Biomedical Engineering at Harvard, talked about starting up AIR, getting it funded by Polaris, and selling it to Alkermes for $114m in 18 months. Both were predictably inspiring but also very humble about their businesses origins (and set a great example for the opportunity that could come out of a raw startup.)
Entrepreneurship, especially in the life sciences (maybe that’s a nod to the new MIT President Susan Hockfield) continues to be alive and well at MIT.
Jason Calacanis just forwarded me a fun post he just put up titled Sparring with VCs & Associates to sharpen your skills. While not all VCs are as clueless as the dmf that it appears Jason talked to, I’ve had plenty of conversations that resemble this one (where I’m on the receiving end – substitute “Brad” for “Me”) during “due diligence” calls with other VCs that are interested in companies I’m either looking at or already an investor in.
Someone (I can’t remember who – maybe my dad?) told me a long time ago that “the question is much more important than the answer.” While this probably fits in “the journey is the reward” cliche category, Jason’s dialogue points this out in spades.
I received a number of requests for copies of The Buffett Letters as a result of my recent post. I now have emailable copies of them – if you’d like them, simply send me an email request. The email I have came with the following request:
“Now, the important part. These letters are not our property. Mr. Buffett wrote them to his business partners, not to the general public. But they are of great interest, and Mr. Buffett has let it be known that he has no objection to people passing them around like this, but does not care for the idea of them being posted in a public forum. Please honor his wishes. PLEASE DO NOT POST THESE LETTERS, AND PLEASE BE SURE TO INCLUDE THIS PARAGRAPH WHEN SHARING. Thank you.”
So – please honor this.
I also have several great Charlie Munger speeches that have no such disclaimer, although I will treat them the same way. If you want them, just ask.
Several people have recently asked me variants on the question “How should I compensate a board member in my young private company?” I’ve experienced this question from all sides, having been the entrepreneur with an early stage company, a board member of an early stage company, and an investor / VC in companies that had board members at early stages, so hopefully my answer is balanced and a function of the law of large numbers (I probably have over 100 direct data points at this point in my life).
In general, I have a set of simple rules for board member compensation:
Following is a detailed explanation of each item.
0.25% to 1.00% vesting annually over four years: While the ask from sophisticated board members will vary widely here, I’ve found that most people will accept the argument that they are getting between 25% and 50% of what a typical VP will receive (1% – 2%). It’s always better to grant more options that vest over a longer period of time then to do annual grants early in the life of the company – that way the board members’ incentives are aligned with all shareholders (presumably they are getting the options at a low strike price and will be motivated to increase the value of the stock while minimizing dilution over future financings). These options should come out of the employee option pool and should be thought of equivalently to the employee base (e.g. if there is an option refresh due to a down round financing, the board member should be included in the refresh).
Single trigger acceleration on change of control: Acceleration on change of control is often a hotly negotiated item in a venture financing. I’ll discuss it in greater detail in a future post in the term sheet series. I rarely think single trigger acceleration in change of control is appropriate, but I’ll always accept it with regard to board members since 100% of the time they will not be part of the company post acquisition. By providing 100% acceleration on change of control, you eliminate any conflict of incentives in an M&A scenario.
Clear understanding as to how the vesting will work if the board member leaves the board: In most cases, board members serve at the will of a particular constituency, which could range from a particular VC investor (e.g. the outside board member might be appointed by the Series A shareholders) to the entire shareholder base (e.g. chosen by a shareholder vote). As a result, a non-VC board member is typically not contractually entitled to their board seat and often leaves the board (either because they chose to due to other responsibilities), is asked to leave (because he is not contributing actively to the business), or is replaced (by the shareholder group that has the contractual right to the board seat). As a result, it should be clear – in advance – that the vesting on the options ends if the person is asked to leave the board or voluntarily leaves the board. I’ve never had an issue with this when it was discussed up front; I’ve occasionally had issues when it wasn’t (e.g. the person wants additional vesting beyond their board service, which I think is inappropriate except in the case of the acquisition of the company – see the comment on single trigger above).
No direct cash compensation: Period. If someone is asking for cash compensation for board service in an early stage company, they are not qualified to be a board member since they simply don’t get it. If the board member is also doing specific consulting for the company beyond the scope of a typical board member, you’ll occasionally see some cash comp for the consulting services. However, the bar for this should be high and well defined – a “monthly retainer” for “helping the company” is inappropriate.
Reimbursements for reasonable expenses: Board members should always be reimbursed for expenses they incur on behalf of the company. However, these should be “reasonable”, should conform to the company’s expense policy (e.g. if execs travel coach, board members should only be reimbursed for coach tickets), and board members should be respectful of cash in early stage companies (for example, if a board member travels to several companies during a trip, he should only charge a company for the segment(s) pertaining to them).
Opportunity to invest in the most recent financing: I strongly believe that all board members should be given an opportunity to invest on the same terms as the most recent VC investment. Depending on the characteristics of your most recent financing, this might be difficult (check with your lawyers) – at the minimum the board member should be invited to invest in your next round. While I always encourage this investment, I don’t view it as mandatory – I think it’s a benefit an outside board member should have for serving on a board, not a requirement.
In seed stage companies – especially pre-funding – an early board member might receive founder status depending on his involvement in the company. When I was making angel investments, I’d occasionally commit to a much higher role than simply “a board member” – occasionally I’d be chairman and/or an active part time member of the management team. In these cases, I’d typically get an additional equity grant (usually founders stock) separate from my board grant. As with other members of the founding team, I’d have specific roles and responsibilities associated with my involvement (usually financing, strategy, and partnership related) and – even though I was a board member – I was often accountable to the CEO for these responsibilities.
In addition to a board of directors, many early stage companies have an advisory board. I’ll dedicate a longer post to how to make sure these are effective (as they rarely are) – in any event, advisors typically have a much lower commitment to the company and, as a result, should receive a much lower equity grant. In addition, advisory boards tend to come and go so it’s better to compensate members on an annual basis. A good proxy for the amount is an annual grant of 25% to 50% of the four year grant you’d give a junior engineer (so 1x – 2x a junior engineer if the advisor stays engaged for four years). Obviously, there are exceptions to this, but if you want to get meaningful, sustainable involvement from an “advisor”, consider giving him a more significant role.
Finally, VCs should never get additional equity for board service in private companies. The VC has already purchased his equity and his board involvement is a function of his responsibilities associated with his investment. I’ve been on the receiving end of this and it has always felt weird. In a public company, it’s typical to compensate all board members – including the VCs – equivalently, but private companies are a different matter.
I landed in Paris today to visit Amy for a week (she’s spending six weeks over here to immerse herself in French). I usually get the sleep thing right on international flights – I screwed up this time because I was tired and crashed on the leg from Denver to Cincinnati. So – I had a nice seven hour flight to listen to music on my Bose QuietComfort 2 Headphones and read.
After my post on Warren Buffett’s Annual Shareholder Letter, one of my blog readers sent me the “Annual Letters of Buffett Partnership, Limited, 1957 – 1970.” Unfortunately (again – maybe it’s Paris) I forgot who sent this to me. I apologize – my mother taught me to always say thank you and acknowledge others. At 39, I have to write certain things down to remember them and – since I’m on a continual holy mission to revolutionize the way I interact with computers (which includes eliminating paper from my life) – I didn’t write it down. And – ironically – in this case – I printed them out (rather than tossing them in my “Inbox -> Read” folder), so I don’t have the original email. So – if you are the one, thank you – feel free to put up a comment saying “hey Brad – you buckethead – it was me.”
You’d think that at midnight Colorado time I’d finally fall asleep on the flight. But, in between finishing off a series of speeches by Buffett’s long time partner Charlie Munger (sent to me by the same person – I think <g>) and grinding through Buffett’s letters, sleep was not forthcoming.
The letters are a work of art. Buffett demonstrates his brilliance from age 25 to 39 (yikes – there’s that 39 again) – both in investing, how he operates his business, and how he communicates. They are just magnificent.
I considered posting several things from them. However, in several places, it was made clear that these letters are not for public consumption. Specifically, “while they are of great interest, and Mr. Buffet has let it be known that he has no objection to people passing them around like this, but does not care for the idea of them being posted in a public forum. Please honor his wishes. PLEASE DO NOT POST THESE LETTERS.” So – I respect that and will merely tease you with the delight I got from reading them, even if they contributed to my need to sleep from noon Paris time until 4pm today.
Software revenue recognition can be incredibly complex in today’s world of SaaS, perpetual vs. subscription licensing, SEC SAB 101 (and others), new FASB pronouncements, and the legacy of bad (or fraudulent) revenue recognition policies at companies like Computer Associates.
I believe the right approach for an early stage software company is to come up with a revenue recognition policy, vet it with your outside auditors, document it, and then stick to it no matter what. The only changes should come from direction from the outside auditors at the end of the year during the audit (or – quarterly during the audit if you are a public company).
So – it’s a great pleasure when I receive a copy of an email from a CEO to his entire management team who is obsessed with doing things right (in this case I’m the lead board member on the audit committee).
Folks – let me be crystal clear on this. We have our approved revenue recognition policy and we aren’t to deviate from it without proper authorization. Please do not ask X (CFO) to do anything differently than what is in this document. Additionally, if you see anything being done incorrectly please escalate to myself or Brad (or if anybody perceives me pushing for something incorrect, please alert Brad immediately). Thank you.
Unambiguous, clear, unwavering, and inclusive of the board / audit committee. As Q105 comes to a close, make sure you’ve got your revenue recognition policy in place, everyone understands it, and it’s unambiguous how to behave.
Warren Buffett is one of my business heros – I think he is amazing on many different levels. His Berkshire Hathaway annual shareholder letter is legendary (and a model that everyone should follow) – the 2004 annual report is out and the letter is available online. It’s required reading for anyone running a company – for substance, organization, style, tone, and wit.
If you feel ambitious, you can (and should) read the Berkshire Hathaway shareholder letters going back to 1977.
I’ve written before about how most powerpoint presentations are miserable and gave some specific suggestions on how to make them better if you are presenting to me (or any other VC). I read today on Cliff Atkinson’s blog that adding text to a screen in a powerpoint presentation that is identical to the narration harms the ability of the audience to understand the information. If you remove the text, information retention increases by 28% and information transfer increases by 79%. This is no huge surprise if you are a follower of Seth Godin’s methods to Avoid Really Bad Powerpoint – Seth’s actual article is here.
Historically, I’ve restrained myself when someone puts up a slide with bullet points on it and then proceeds to read the bullets. I always have the urge to shout “shut up – I’ll just read it”, especially since I process information much better by reading then by listening. It’s the same urge that I used to have as a kid when I sat in the synagogue during high holy days and wanted to jump up and shout “but I’m not sure god exists.”
I’m not going to restrain myself anymore.
I’m at the Microsoft Partner Advisory Council (PAC) meeting (I’m on Microsoft’s Venture Capital PAC). Simon Witts – the Corporate VP of the Enterprise and Partner Group – is keynoting the morning session. It unbelievable (and extremely impressive) how much Microsoft measures about their business. In his session, Simon has been extremely candid about positives and negatives based on what they forecasted for 1H05 (7/04 – 12/04), how they actually did, how this impacts their partner channel, the feedback loop that results, and what they are changing to perform even better.
While he was talking, I got my monthly status report from Rally. It’s full of metrics – actual against forecast – and a discussion of the delta. These metrics are across the entire business – it’s not just accounting, financial, or sales data – it’s information across the business. Last night, I looked at my weekly report from StillSecure – same story – full of metrics along with discussion of what’s going on in the business.
While it’s easy to get lost in “data” rather than synthesizing and understanding “information”, I find way too many early stage companies measuring very little – thinking this is something that “only big companies both with.” Microsoft shows how it’s completely ingrained in their culture – in my experience with them, they’ve been measuring everything forever.
The value of building this discipline into the fabric of a startup is huge. Automate as much as you can early in your life – turn “data” into information – and continually refine what you are measuring to make sure it’s the relevant stuff. But measure it.