Startup Lifestyle

Mental Health Matters

In December 2018, Lyft’s co-founder and President John Zimmer broke new ground by speaking publicly about his struggle with depression. CNN’s Laurie Segall published an interview with Zimmer where he spoke about the challenges of competing against Uber, a company that raised 10 times the capital raised by Lyft. Though they provide similar services, press and analysts hailed Uber as the disruptor and treated Lyft almost as an also-ran. Critics wondered if Lyft would even survive. During this time, Zimmer found himself “in a dark place” and was “in a funk for several months”.

Sadly, Zimmer’s transparency is rare in the Silicon Valley. The pressures and burdens of a continuous, breakneck pace with minimal financial resources can leave entrepreneurs feeling like they are skydivers frantically trying to assemble their parachute while they are freefalling past 10,000 feet. The fact of the matter is that startup life isn’t all glamorous hack-a-thons and butter-smooth Agile sprints. Not everyone buys into your vision. Venture capitalists don’t regularly beat down your door to give you money. All apps don’t go viral. And considering the total number of startups, companies with billion-dollar valuations are almost as rare as the unicorns they are named after.

Routine Sprint-a-thons

The truth is that startup life is hard. Silicon Valley culture promotes an always-at-work lifestyle. When most of your colleagues work six or seven days a week, it creates a palpable pressure to follow suit. Small startups attempting to disrupt their market represent the ultimate underdog David vs. Goliath battle. The urgency to retain first-mover advantage drives an expectation of non-stop sprints. Most people understand that sprints and marathons are very different types of races, but Silicon Valley seems to sadistically believe that sprint-a-thons represent a sustainable way of life. For an emerging startup, it can feel like you’re in a perpetual state of crunch time.

In normal life, people who exhaust themselves sprinting to reach the finish line get some time to decompress and recharge afterwards. In startup world, the reward for meeting a deadline is usually the next crazy deadline. Instead of resting after working hard, recovery is replaced with playing hard, blowing off steam, and partying. Numerous news reports chronicle the under-the-radar substance abuse problem that is all too common among tech startups. This news stream seemed to peak briefly in November 2013 when former Google executive Timothy Hayes died from a heroin overdose aboard his yacht in Santa Cruz. It briefly spiked again in December 2018 when Colin Kroll, co-founder of Vine and HQ Trivia, died of an apparent drug overdose. Kroll’s father reported that his son routinely worked 100 hours a week. As co-founder of prolific payment provider Square, Tristan O’Tierney was set for life, but died in February 2019, likely due to an addiction problem he previously disclosed on Twitter.

Cognitive Steroids

In light of the crushing pace, employees need to be able to consistently perform at the highest possible level. In the tech world, it’s quite possible to have one developer produce 10 to 20 times more quality output than the next. Tech workers can be tempted to find a solution they believe will help them to continuously excel and produce, as the threat of failure can lead to the company replacing them with another hotshot new hire, or worse, in the company shutting down.

The challenge is that it’s nearly impossible to hit a home run every time you step to the plate. Major League Baseball was rocked in recent years by a series of reports that its biggest stars used steroids: Jose Canseco, Mark McGwire, Sammy Sosa, Barry Bonds, Rafael Palmeiro, Alex Rodriguez and many others tested positive for performance-enhancing drugs. All of these players had tremendous raw talent, but felt the need for just a little more juice to boost their abilities.

Since both athletes and tech workers are human, it’s inevitable that startup employees face the same temptations. Red Bull and coffee eventually fail to adequately feed the voracious appetite of the strive-for-performance engine, so it’s not a stretch to see people trying to upgrade to some form of rocket fuel. Where one industry enhances physical strength with steroids, another enhances knowledge worker abilities with psychostimulants.

Adderall, a prescription drug that treats Attention Deficit Disorder, is popular on college campuses as a cognitive enhancer. Its popularity as a “smart pill” has spilled over into the tech space as well. The lure of a smart pill is even dramatized in the movie and television series, Limitless. Adderall holds a reputation as a smart pill that helps high-functioning people become higher-functioning. This reputation exists in spite of a study by Dr. Martha Farah at the University of Pennsylvania that suggests “higher-performing people show no improvement or actually get worse” from taking Adderall.

It’s common for college students and tech workers alike to rationalize their off-label Adderall usage by thinking it’s just a stronger form of caffeine and not as addictive as cocaine. While there may be some truth about Adderall being less addictive than cocaine, dependence can still form due to the added release and absorption of dopamine. Like all drugs, Adderall also has a long list of side effects including hypertension and cardiovascular disease. In addition, all prescription drugs run the risk of triggering dangerous interactions with other medications. Finally, there’s still the fundamental issue of a workplace culture that leads people to illicit drug usage.

Superman Syndrome

Silicon Valley also worships the superhuman: hero hackers, serial entrepreneurs with multiple exits, and celebrity founders can all achieve rock-star status. But the reality is that most startups fail, including those founded by some of the world’s brightest and most promising people. Sometimes, the shock of failure for people who are used to succeeding becomes too much to handle. Or, even if the startup continues to operate, just the daily startup grind can become too much. Sadly, there are too many tales of promising, capable people deciding that ending their life is more appealing than continuing to fight:

  • Ilya Zhitomirskiy, founder of “Facebook killer” Diaspora, was rumored to have committed suicide in November 2011. He died 22 years young.
  • Eric Salvatierra, CFO of Skype, VP at PayPal, stepped in front of a train in March 2012. He was 39 years old.
  • Aaron Swartz, co-founder of Reddit, hanged himself in January 2013. He was just 26 years old.
  • Jody Sherman, co-founder and CEO of Ecomom, shot himself in January 2013.
  • Zaria Draganic, CEO of AltoCom, ended his life in March 2014.
  • Austen Heinz, CEO of Cambrian Genomics, committed suicide in May 2015. He died at age 31.

Silent Suffering

Many of these people suffered in silence because society still stigmatizes mental health needs. This is sad because mental health challenges are more common than we may know. The National Institute of Mental Health reports that 19.1% (62 million) of American adults live with anxiety disorders and 7.1% (23 million) live with major depression. Research from Dr. Michael Freeman, a psychiatrist at UCSF, indicates that entrepreneurs are 50% more likely to have a mental health condition. So if 19.1% of the general population lives with an anxiety disorder, then about 29% of entrepreneurs suffer from anxiety.

People tend to react with compassion and empathy when someone tells them they have cancer. However, most people don’t know how to react when learning a colleague, friend, or family member has a mental health challenge. Responses vary from awkward silence to criticism (spoken and unspoken) of how the person must be weak in some way. If we are honest with ourselves, we are all weak in multiple ways. Anyone who has a hard time identifying their weaknesses probably struggles with pride or arrogance.

We can all help to de-stigmatize anxiety, depression, obsessiveness, or other conditions by treating people with mental health needs no differently than people with medical needs. Most people don’t bat an eye if a colleague or friend needs insulin to treat their diabetes or needs time off to recover from a broken bone. We should offer the same understanding and caring support for people who take anti-depressants or suffer from panic attacks.

Untreated Pain

I personally endured extended angst and anxiety for decades. I have always had very high expectations for myself and those around me. When I or those around me failed to meet these expectations, I usually found myself in a tailspin emotionally.

When I was CEO of startup #4, a number of circumstances led to serious problems on a big customer project. These problems resulted in missing several key deadlines, which ended up costing the customer a lot of money. The customer blamed us and threatened to sue. Since I had to personally guarantee the company’s finances, any losses would hit me hard. Resolving the customer’s problems and getting the project back on track stole my entire attention. In addition to the full-time job of running the company, I added about 40+ hours to every week working to avoid a lawsuit. I felt like I was playing an endless game of Whac-a-Mole, as clearing one hurdle only led us to the next obstacle. No matter how many hours we spent, we still couldn’t break through the logjam blocking the project. My stress level was off the charts for many months. I honestly started entertaining thoughts of ending my life. I welcomed the prospect of no longer having to deal with angry customers or threatening lawyers.

Thankfully, I had a strong support network. I reached out to many friends and mentors. Some really tried to help, but didn’t have the background to really understand the details of my predicament, so their advice didn’t address any of the root cause problems. (This actually added to my stress!) I had to persevere through this — knowing that people were trying to help — to get to those who had the background and wisdom to correctly identify and address the core problem.

One wise friend suggested I seek professional counseling. I initially bristled at the thought, as my prejudices reflexively took control. I didn’t want to appear weak. I didn’t want to have others potentially look down on me. I didn’t want to waste the time or the money. I doubted that a therapist could help me. In spite of all these excuses, the pain of staying the same was worse than the potential pain of seeking therapy. Engaging a trained counselor ended up being one of the best decisions I could have made.

After several sessions, I received a diagnosis of Obsessive-Compulsive Personality Disorder (OCPD). The name often creates confusion, given its similarity to Obsessive-Compulsive Disorder (OCD). Even though the names are similar, the conditions are vastly different. The Wikipedia definitions for OCPD and OCD follow below:

Obsessive-Compulsive Personality Disorder (OCPD)

A personality disorder characterized by a general pattern of concern with orderliness, perfectionism, excessive attention to details, mental and interpersonal control, and a need for control over one’s environment, at the expense of flexibility, openness to experience, and efficiency.

Obsessive-Compulsive Disorder (OCD)

A mental disorder where people feel the need to check things repeatedly, perform certain routines repeatedly (called “rituals”), or have certain thoughts repeatedly (called “obsessions”).

Basically, people with OCPD are perfectionists. In fact, a better name would be Perfectionistic Personality Disorder. In the workplace, OCPD can be viewed as a valuable trait, as perfectionists tend to do great work. However, OCPD can wreck your life or your relationships as you tend to repeatedly make poor, unbalanced decisions. OCPD made me see the distressed customer project as imperfect, so it was my job to fix it all, no matter what the cost personally.

If I or someone I depend on makes a mistake, I have a hard time letting it go and moving on. OCPD makes it hard for me to step away from work. I constantly think about work and will wake up in the middle of the night solving problems and refining business plans in my head. I struggle with healthy boundaries, always feeling that I need to make every deliverable great, even if the customer would be happy with good-enough. If left unchecked, I will spend excessive amounts of time and energy creating artwork worthy of a museum when a stick-figure drawing would have been sufficient.

As I worked with my therapist, we developed strategies to combat my obsessive tendencies. He helped me to build boundaries that vastly improved my quality of life. He even helped me to think differently about therapy. Since I love sports, I have no problem receiving coaching. As an advisor, I have no problem giving or receiving guidance and mentorship. I learned to think of my therapist as a life coach instead of a psychologist.

I’m grateful I listened to the advice of my friend. I have tools to help me live with my obsessive tendencies. My quality of life has greatly improved.

Similarly, when he was in a dark spot, John Zimmer received great support from his wife and from Lyft CEO, Logan Green. Zimmer advises us to invest into connecting with others, as that’s what matters most. In spite of the distractions that threaten to drown us, make time to meet with people in person. Care for others and allow others to care for you.

Into the Light

Thankfully, in addition to John Zimmer, several industry thought leaders are working to bring these real problems out of the shadows and into the light:

  • Ben Huh, CEO of The Cheezburger Network, wrote an amazingly candid post about his failures and why death once felt like a good option.
  • Brad Feld, an entrepreneur turned venture capitalist, and his wife Amy Batchelor, an activist and community builder, wrote a Startup Life, a book about “surviving and thriving in a relationship with an entrepreneur.” The book is remarkable in its transparency about their own real-life relationship problems.
  • Sean Percival, an entrepreneur and investor, wrote about his struggles with depression after a friend and kindred spirit took his own life.
  • Brené Brown, a research professor at the University of Houston, spent two decades studying courage, vulnerability, shame, and empathy. Her June 2010 Ted Talk on vulnerability included many personal and potentially embarrassing stories. It continues to be one of the most popular and impactful among their entire library of over 3,000 talks. Dealing with mental health starts with the willingness to be vulnerable and rebuff shame.

I’m grateful for each of the courageous souls who have chosen to be transparent with their challenges. Brené Brown’s transparency on stage in a large public forum literally took my breath away and made me sit up and pay close attention. She models the vulnerability her research advocates. Vulnerability is key to getting help and to building connections. Even though I’ve never met Brown, I feel a connection to her because her talks about vulnerability and shame resonate deeply with me.

Shame is a difficult problem, particularly in Asian cultures, where saving face and looking good seem to be top priority. The startup world faces similar challenges, as incredibly talented and successful people face obstacles larger than any they’ve previously encountered.

Trainers Needed (and Wanted)

Professional sports teams are built on the talents of the best athletes in the world. Every sports team includes a trainer to tend to the many injuries, both small and large, that athletes endure. Startups should learn from the sports world and provide resources to help founders navigate the turbulent world of entrepreneurship. Recent developments include:

  • Jake Chapman, a general partner at Alpha Bridge Ventures, published an excellent article on TechCrunch challenging investors and entrepreneurs to address the mental health crisis in startups.
  • Erin Frey, co-founder at Kip (HelloKip.com), created an Investor Pledge for Mental Health on Medium. A growing list of pioneering investors have signed onto the pledge.
  • Mahendra Ramsinghani, Managing Director at Secure Octane, created an anonymous survey to collect mental health data from entrepreneurs. He plans to incorporate the survey data in a book he’s currently writing.
  • Mark Suster, another entrepreneur turned venture capitalist, issued a heart-felt plea to de-stigmatize depression and mental illness.

We can all amplify this small, but growing movement. Learn to recognize, acknowledge, de-stigmatize, and address mental health challenges. Accept others for who they are. Learn to fight against shame and practice being vulnerable — it’ll help you build connections with others that you’ll value. Invest heavily in your relationships. Entrepreneurs who’ve been to the brink and back consistent lobby for the need to keep your relationships strong.

Startup life carries a high risk of mental health challenges. Mental health needs to be viewed with the same importance as physical health. As you continue your journey down the startup path, investing in mental health will better equip you to achieve your goals while also minimizing your pain.

Resources

Startup Execution, Startup Fundraising

Keys to the Term Sheet

Early-stage founders spend a large portion of their time raising capital to fuel their startup’s continued growth. Receiving a term sheet from an investor represents a key milestone in the fundraising journey. First-time founders often scramble at the last minute to educate themselves on the concepts and terms found in a typical term sheet. There are many web resources that provide insight into the definitions of concepts captured in the term sheet. However, in addition to learning the mechanics of a term sheet, I strongly advise entrepreneurs to take a step back and consider the big picture of what each party wants from the investment. This is key to driving an effective and reasonable negotiation.


I’m often surprised to find that very few advisors counsel their startup founders to understand what the incoming investor cares about. Failure to do so can unnecessarily complicate negotiations. I advise founders to apply a principle from my blog posting The Art of War on competing effectively: know your enemy. I do not suggest that founders take an adversarial stance with their incoming investors. I do encourage founders to put themselves into the investor’s shoes to know and understand what’s important to them. Once you understand the investor’s goals, you can formulate a positioning that addresses the investor’s issues while still maximizing your negotiating stance.

What Investors Want

Investors fundamentally care about three key factors when negotiating a potential investment:

  1. Ownership structure: how much each party will own.
  2. Governance: who will be able to influence and control the key decisions of the company.
  3. Down-side protection: what happens if the startup doesn’t meet expectations.

There are many other lessor considerations, but fundamentally, these three dominate the others.

Ownership

Ownership reigns as the most important consideration in the term sheet. Ownership share directly affects each party’s potential payout. Multiple factors affect the ownership, but the pre-money valuation and the size of the unallocated option pool often have the largest impact on each stakeholder’s final ownership share.

The pre-money valuation combined with the amount invested determines the post-money valuation. The amount invested and the post-money valuation determines the investor’s ownership share. The diagrams below illustrate this.

The size of the unallocated stock option pool can sometimes surprise founders as a negotiating point. Most early-stage companies only have a fraction of the employees needed to grow and scale. Many investors expect the founders to carve out a large share of stock to allocate to future employees. Investors typically want a larger pool (25% or more) created while founders want a smaller pool (15% or less). The investors want to minimize the likelihood that the employees hired will exhaust the pool, so they ask the founders to create a larger pool before the funding closes. This dilutes the existing stockholders, but does not dilute the incoming investors, as the dilution happens before the investment closes. In contrast, the founders prefer a smaller pool to minimize their dilution. Additional stock can be issued to replenish the pool if it is exhausted in the future. The dilution from any stock issued in the future gets spread across a larger group of stockholders, resulting in less dilution for the founders.

The point isn’t to get a perfect projection of how much stock will be allocated to employees the startup hasn’t even hired yet, but to position for possible future dilution.

The pie chart below illustrates a representative ownership split after the investment closes — obviously, your specific situation may vary.

Investors also often negotiate for pre-emptive rights (the right to invest their pro-rata share in all future financing) to protect their ownership percentage as the startup grows. Many investors fight hard for this right so they can continue to invest in their best performing companies. In most cases, pro-rata share is reasonable. Founders should be wary of multiple pre-emption or “super pre-emption,” which grants the existing investors the right to invest more than their pro-rata share.

Founders should also be wary of right of first refusal (ROFR), which allows existing investors to take the entire round at the negotiated terms. ROFR often scares away incoming investors, as they have little assurance that their due diligence on the potential investment will result in closing the financing, as the existing investor could exercise ROFR and take the deal away from them. If incoming investors are reluctant, founders then have fewer options for their next round of financing, resulting in the existing investors getting much more favorable terms (i.e., lower valuation) on the next round.

Governance

Probably the next most important consideration is the governance of the startup — who controls and influences major decisions or events in the company’s future. The most important component of a company’s governance is the composition of the board of directors. The board votes on major company decisions such as an acquisition, accepting new financing, large budgetary expenditures, who holds the CEO role, etc. The party that controls the board for the most part controls the company. It is common for both the founders and the incoming investors to jockey over the number of board seats. One approach is to have the board reflect the ownership ratio of the major shareholders. If the founders own 70% and the incoming investor owns 30%, this approach gives the founders two board seats and the incoming investor one. Another approach is to agree to a balanced representation on a five-member board consisting of:

  • Two common stockholders: typically, two employees/founders.
  • Two preferred stockholders: typically, two investors.
  • One neutral, outside party mutually agreed upon by the founders and investors.

Investors also often ask for the right to block certain corporate actions, regardless of the distribution of board seats or percentage ownership. Common actions requiring approval of preferred stockholders include:

  • Creation of a senior security (typically, the next round of financing).
  • Changes to preferred stockholder rights.
  • Changes to the size of the board of directors.
  • Company acquisition.
  • Entering into a contract above a certain size.

Founders often negotiate to limit the number of protective provisions granted to preferred stockholders. However, some protection provisions are common. Very few investments are closed with no protective provisions granted to the preferred stockholders.

Down-side Protection

Both the founders and investors contribute time, money, and effort because they expect the company to significantly grow in value. However, some companies grow slower than projected. Early dreams of 100x returns are dampened by the realities of an acquisition that is just two times the valuation of the most recent funding round. Double the previous valuation is still growth, but typically doesn’t provide a reasonable return in the high-risk game of venture capital.

Investors often lobby for a liquidation preference with full participation (commonly referred to as a “double dip” for the investor as they have two different pathways to be paid upon an acquisition) in order to provide protection against an underwhelming acquisition price. If the founders enjoy strong leverage during the fundraising, they can negotiate for a liquidation preference with no participation. A reasonable middle ground can be a liquidation preference with a cap on the participation.

In other scenarios, the startup may stumble, encounter circumstances beyond their control (e.g., geopolitical unrest, global economic weakness, etc.), or fail to execute, resulting in the value of the company actually shrinking. In such cases, the startup may need to raise additional funds in a “down round” — where the next round’s valuation is lower than the previous round of fundraising. Or, none of these situations may happen – the company may decide to issue warrants or additional stock to address a specific business need. To protect against these dilution scenarios, investors negotiate for anti-dilution rights.

Positioned for Win-Win

Term sheets are full of complex concepts and legalese. It’s important to understand the legal constructs, but it’s more important to understand why they exist. When founders strive to think like an investor – when founders walk a mile in the investor’s shoes – you can understand what the investor wants and even anticipate what they will ask for. By knowing the investor and their goals, founders can: 1) explain why some concerns do not apply in your specific situation, 2) formulate responses that mitigate the concerns that do apply, and 3) propose more palatable alternatives that accomplish a similar outcome as the investor’s more aggressive request. With this understanding, founders become more effective at negotiating win-win agreements that both parties can feel good about.

Startup Execution

Getting to Minimum Viable Product

Every venture capitalist, board member and startup advisor counsels the entrepreneur to focus on building their minimum viable product (MVP). Successful startups do a great job of executing on their MVP buildout. Once their MVP is established, adding prioritized functionality transforms the product from acceptable, to good, to great.

Drilling Deeper

Everyone understands the concept behind MVP. But how exactly does a company build out its MVP? What does “viable” look like? Because every company has a different product, it’s impossible to provide specific advice for each situation. However, by drilling down to the next layer of detail, insights become more clear. When discussing MVP, I typically prefer to use the following five terms:

  1. Earliest showable product
  2. Earliest testable product
  3. Earliest usable product
  4. Earliest likable product
  5. Earliest lovable product

The diagram below shows the MVP progression from a user’s current state to an early lovable product.

 

An MVP Example

These abstract concepts frame up the process, but I find it helps to provide a specific example. In this case, let’s assume we’re trying to improve the infrastructure of a package delivery business. Today, the delivery couriers (generically, “users”) have very little infrastructure — packages are hand carried by the users to the destination. Building a delivery truck for the courier may look something like the process below.

 

Showable

Some may ask “what is the benefit of creating something that the user can see, but not use?” This is actually done all the time across many different industries. I’ve often been to trade shows where a vendor has a product in development that isn’t quite ready for anyone to use. In such cases, a very early prototype of the product might be in the vendor’s private “whisper suite” sitting under glass. A few invited visitors that have signed a non-disclosure agreement can look, but can’t touch. If the product is an application, maybe the visitor can watch a recorded demo video, but there’s no ability to deviate from the pre-recorded demo script. There are still many benefits to this as users will start to talk and ask questions. You learn from listening to the questions asked. You get a sense for what users consider important. Often, the user asks some questions that leads to a low-level requirement that wasn’t previously considered.

In this example, the delivery truck is nothing more than a barren truck frame with four wheels. Without an engine, someone has to push the truck frame like an overgrown hand cart. The user might ask how the cart is steered or whether it makes more sense to push or to pull the platform. Regardless of what the question is, you want the user to be engaged.

In the software world, the earliest showable product might be nothing more than a bunch of web pages stitched together to demonstrate the flow of a small application. Each web page has a few constructs on it (text, fields, photos, diagrams, buttons, etc.) but there’s no material code behind anything. Everything is hard-coded with static data. The only thing that works is the navigation between web pages and maybe one or two simple features. You just want to open the eyes of the users to what you have in mind.

Getting early user feedback and discussions certainly helps the development process. However, in my experience, the main benefit of building something showable is to force your engineering team to get started. Too often, the team can get mired asking questions about technical details: Should the front-end framework be built on Angular, React, or Vue? Should the back-end be built in Python/Django, Ruby on Rails, or JavaScript/Express? Should the database be MySQL or NoSQL? The key is to do some quick analysis by seasoned developers, secure buy-in, build out your development environment, and then get started. These tasks themselves can take time, which is why it’s important to push to make some decisions. The team can then focus on familiarizing themselves with the business problem and teasing out specific requirements.

 

Testable

For this evolution of the delivery truck, the earliest testable product adds a folding chair, a steering system and a braking system to the platform. You can invite a small number of users to test the product. Users can actually sit in the cockpit and manipulate some controls. The platform may still be missing some key features. In this example, because the truck lacks an engine, the only way for the user to test some package deliveries with the truck is if the platform is going downhill. Yes, that’s clearly very limiting, but you’ve properly set the users’ expectations by communicating in advance. The point is it’s possible for a few users to put their hands on the product and provide feedback. The initial feedback might be nothing more than: 1) it’s very difficult to turn the steering wheel (because it has a manual steering system) and 2) the folding chair lacks lumbar support and gets pretty uncomfortable when you sit in it all day. Users might not be thrilled, but they are seeing rapid progress and starting to ideate with you.

 

Usable

After receiving the initial user feedback, the engineering team adds a few quick enhancements to the product roadmap. The plan for the earliest usable product already included an engine and a fuel system, but the engineers also replace the folding chair with a traditional automotive bucket seat and install a power steering system. Since the truck platform now has a small engine, it can carry more packages and has a maximum speed of five miles per hour. A limited number of beta users can make deliveries with the truck. Since the platform doesn’t have a body or a roof, it can’t be used in inclement weather, but at least it’s no longer limited to downhill roads only. After using the truck, the users ask for: 1) higher speed (which was completely expected), 2) something to help them lift heavier packages from the ground to the cargo area, and 3) a way to organize the packages in the cargo area. None of the engineers previously realized how back-breaking it can be to lift packages all day. Nor did they understand how it slows down the courier if they have to move other packages out of the way in order to get access to a specific package in the middle of the truck. One user specifically requested the shelving system when they needed to deliver package #2, but had to move packages #1, #4, and #5 first. These last two feedback items would not have been uncovered if the product wasn’t actually being used.

 

Likable

At this point, the product is really starting to take shape. The engineers add a transmission and design a shelving system to organize the packages. The lift gate couldn’t be added yet because the weight that needed to be lifted required a larger battery system, so it’s been deferred to a later release. A larger pool of users signs up to use the product. Adding the transmission increases the truck’s maximum speed, but since the engine is still undersized, the truck tops out at 35 mph. The engineering team also builds a body around the driver cockpit and passenger area, but the packages in the cargo area are still exposed to the elements. With a larger pool of users, product suggestions start to really flow in. To deal with some of the user expectations, you begin sharing a high-level product roadmap.

 

Lovable

Finally, the engineers build the body around the cargo area, resulting in a fully enclosed vehicle. Engineers have been busy, as they’ve also added the lift gate, upgraded the engine (so the vehicle’s max speed is now 65 mph), and added basic wireless / GPS / navigation capabilities. The marketing team begins to salivate as they envision advanced real-time tracking and telemetry, giving package recipients unparalleled ability to track their deliveries. As a bonus, the marketing team also hired a graphic artist to advertise the delivery company’s logo and services on the side of the van.

 

Typical Pathways to MVP

The table below helps illustrate how the product development evolves from showable, testable, usable, likable to lovable.

Each of the five key designated releases (showable, testable, usable, likable, lovable) have specific goals, benefits and limitations. Each release also grows from a very narrow, restricted user base to a very broad community. The table above includes an estimated ideal timeframe to help product teams determine the general rate of progress.

Avoid the temptation to rigidly analyze the specific wording of any given cell in the table above. It is more important to remember that this represents an approach to rapidly evolve the product. Also remember that the earliest usable product will not likely be the most usable product, the earliest likable product will not be the most likable product, etc. This approach emphasizes targeting the earliest release that fits the designated goal.

 

Where’s the MVP?

So, what exactly is the MVP? For a very, very simple solution, it might be the earliest showable product. For typical companies, it’s often the earliest testable product. However, for a very demanding solution involving public safety, human lives, large financial risk, sensitive data, or something similar, it can be the earliest usable product. In many cases, the product team may designate the MVP as one of the Agile sprints one or two releases before or after the earliest testable product. Every startup has to adjust their definition of MVP to align with the nature of their product.

Regardless, the point isn’t to get fixated on a specific definition of MVP, but to focus on the overall process to get to MVP and beyond. The key lessons here are: 1) to iterate quickly, 2) to be very disciplined not to overload features into each release, 3) to engage users on every release after the earliest showable product, and 4) to steadily gather feedback. Entrepreneurs who diligently follow this recipe usually make consistent, predictable progress with their product development, which often leads to great success.

 


Startup Execution

YADM – Yet Another Dilution Model

Any programmer or Linux gear head should recognize the “Yet Another …” family of tools and frameworks. Stephen C. Johnson is credited with creating the first Yet Another tool when he created YACC – Yet Another Compiler-Compiler. Some currently popular Yet Another tools or frameworks include:

  • YAML: Yet Another Markup Language (later rebranded as YAML Ain’t Markup Language) – a data serialization language usually used to capture configuration parameters
  • YANG: Yet Another Next Generation – a data modeling language related to network configuration
  • YARN: Yet Another Resource Negotiator – a component of the Apache Hadoop framework

Not to be outdone, I decided to create another Yet Another tool: YADM (Yet Another Dilution Model) – an Excel spreadsheet to help founders model the expected equity dilution as a startup reaches typical funding events.

Dilution is near and dear to the hearts founders everywhere. Many VCs, accelerators and incubators publish guidance on the typical dilution events a startup will encounter in its life cycle. Several web sites also provide downloadable spreadsheets that founders can use to visualize their expected dilution. Given this, why do we need yet another dilution model?

Well, simply put, the spreadsheets I’ve seen hard-code the financial terms of each funding event. Because every startup negotiates slightly different terms with their funding events, I wanted a tool that had some simple “knobs” that the user could turn to model their dilution given the terms of their specific investments.

Many startups have slightly different variations down the path of equity investments. Creating a custom model for each specific pathway is beyond the scope of this effort. To keep things simple, I built the spreadsheet with the following assumptions common to most startups:

  1. The earliest non-founder employees paid primarily with equity
  2. One round of angel or seed investment
  3. Three rounds of traditional VC investment
  4. The equity pool for the employees gets replenished based on the pre-money valuation — this just means that the dilution from the option pool is taken before the investment from the VCs.

I’ve provided a sample funding scenario in the screenshot of the spreadsheet (download here) below.

Yet Another Dilution Model (YADM)

Let’s walk through how this spreadsheet captures various dilution events:

  1. Row 2: The user enters their specific data points of their dilution events in the orange cells in row 2. These orange cells are the “knobs” that the user should turn to model their own dilution scenario.
  2. Column B: When the startup is formed, the founders own 100% of the equity.
  3. Column C: The founders set aside 7.5% of the equity to distribute to the startup’s earliest employees.  The founders now own 92.5% of the company.
  4. Column D: 10% of the company is sold to angel investors.  The founders now own 83.3% of the company.
  5. Column E: The terms of the series A investment requires setting aside 10% of the equity for the employees that will be hired up to the next round of funding. Because most VCs negotiate this 10% to come from the pre-money valuation, the spreadsheet calculates the amount of equity required to reach the 10% pool post-money. The founders now own 72.8% of the company.
  6. Column F: The series A investment closes, with the incoming VCs purchasing 20% of the company. The founders now own 58.3% of the company. Note: some might argue that column E is not needed since the series A investment is the primary outcome of the investment round. However, I break this out separately to help illustrate the multi-step dilution that happens as a result of the series A investment.
  7. Column G: As the series B investment comes together, the employee option pool needs to be replenished back to the 10% target. The same pre-money valuation terms apply. The founders now own 56.1% of the company.
  8. Column H: The series B investment closes, with the incoming VCs purchasing 25% of the company. The founders now own 42.1% of the company.
  9. Column I: As the series C investment draws near, the employee option pool again is replenished back to a target amount. This is essentially the same dilution math as columns E and G. The founders now own 40.9% of the company.
  10. Column J: The series C investment closes, with the incoming VCs purchasing 20% of the company. The founders now own 32.7% of the company.

Hopefully, this spreadsheet helps you model your expected dilution scenario. Feel free to turn the “knobs” of the spreadsheet by changing some of the numbers in the orange cells of row 2.

My life is complete now that I too have published a “Yet Another” tool …


Startup Execution

Legal for Startups

We all hate working with attorneys. That is, until you need one. And when you find one that effectively advocates on your behalf, you love them more than you care to admit.

Every startup needs great counsel. But few startups set themselves up to effectively use counsel. Some startups avoid using outside counsel out of fear that their limited budgets will quickly evaporate. Other startups leverage outside counsel, but end up overspending because they don’t optimize their engagement model. I have two simple recommendations – one strategic and one tactical – to optimize your legal infrastructure.

Build Your Legal Playbook

Strategically, startups need to position themselves to be acquired. This involves ensuring that your company avoids any agreements that would introduce unnecessary or unacceptable risks to a potential suitor. Most startups don’t have the benefit of in-house counsel, but that doesn’t eliminate the need for someone to play that role. Your executive responsible for your legal infrastructure should be a capable negotiator with a strong understanding of your legal strategy. Though all contract language is important, founders and executives should pay particular attention to three areas: indemnification, limitation of liability, and termination.

Language regarding indemnification and limitation of liability are closely related. You should work with your outside counsel to determine standard language that articulates your preferred and acceptable levels of risk. Your contract templates should include your preferred language. You should also have pre-prepared backup language for higher risk tolerances when business justifies it. Having this content in advance enables your head of legal to negotiate and structure contracts without constantly having to engage outside counsel and running up your legal bills on routine negotiations. Of course, I still recommend competent outside counsel when engaged in special or non-routine legal negotiations.

Termination clauses represent another important consideration in your agreements. Companies enter into contracts with the belief that they are in the company’s best interests. However, a company’s goals may change over time. A partnership agreement with company X may be advantageous today, but disadvantageous tomorrow if company X’s key competitor wants to acquire you. You need to ensure that your agreements provide you with the right to terminate at your convenience, with reasonable advance notice, and with minimal penalties. This gives you flexibility to pivot as your company’s goals evolve over time.

Don’t Leave Home Without It

Most startups envision an exit at some point in the future. For many startups, the exit will involve an acquisition. As CEO, I’ve led corporate development and the due diligence tasks for two separate acquisition cycles. I’ve also been part of an executive team that consummated an acquisition by Cisco. After driving or contributing to the activities and due diligence behind three acquisitions, I can speak from personal experience that the process flows much more smoothly when you run a tight ship on all your legal operations.

Specifically, one of the most important tools that should serve as the foundation of your legal operations is a contract management repository. The opposing legal team will ask for all of your contracts during due diligence. Having a tidy contract management repository enables you to deliver every agreement to the opposing counsel in minutes. I’ve seen companies spend weeks hunting for a few remaining agreements because of poor document management and controls. Combing through file servers and individual laptops for the latest contract templates and the fully countersigned version of agreements wastes time and money. Sloppy contract management ultimately results in delays and higher legal bills. More importantly, it injects unwanted concern into a suitor regarding any potential exposure from acquiring your company. Finally, another potential pitfall of failing to accurately track all of your agreements is that you will miss an agreement and fail to hand it over, exposing the founders or the executive team to legal jeopardy. Due diligence is a fast-paced, pressure-packed time where you don’t want to be pulling your hair out chasing down every last agreement, or creating any inhibitors to your company getting a clean bill of health.

A good platform such as DocuSign or Adobe Sign (formerly EchoSign) will not only provide you with a comprehensive contract management repository, but will also automate the process of contract revisions and digital signatures to fully execute the agreement. Clerky is an innovative startup that helps automate some a startup’s basic legal operations and forms. Regardless of which solution you choose, make sure to use the contract management platform for every agreement including, but not limited to:

  • Articles of incorporation or organization
  • Corporate bylaws
  • Operating agreement / founder’s agreement
  • Shareholder agreement
  • Non-disclosure agreements (which may include non-solicitation and/or non-compete clauses)
  • Job applications and offer letters*
  • Intellectual property assignment agreements*
  • Asset ownership agreement*
  • Employment contracts*
  • Financing agreements
  • Stock option program*
  • Restricted stock agreement
  • Sales contracts
  • Purchase agreements
  • Master services agreements
  • Consulting and professional services agreements (statements of work)
  • Partnership agreements
  • Lease agreements
  • Insurance documents
  • Workplace safety / liability release forms*
  • Employee handbook, code of business conduct, etc.*
  • Board documents (meeting announcements, minutes, resolutions, etc.)
  • Advisor agreements

Items marked with an asterisk are often included in a job offer package.

Closing Arguments

Work with your outside counsel to determine your risk tolerance. Then establish baseline preferred and acceptable language for your contract templates. Then develop a playbook to guide the negotiations with prospective agreements. As you negotiate the agreements, make sure all contracts are stored in a repository to facilitate easy access when needed. Implementing these best practices will ensure a smoothly running legal infrastructure that enables instead of hinders your startup.


Startup Lifestyle

Not Your Baby

Founders are a rare breed. They are driven by a vision of what can be to take risks. Founders often invest years of blood, sweat and tears to build and grow their startup. Given the amount of energy, effort, and sacrifice required, it’s not surprising that many founders consider their startup their baby. Some founders use this metaphor casually. Others use it quite literally. In light of the huge commitment required by a startup, founders have to be careful to maintain perspective and balance: a company is not a baby.

The Fun Toddler Years

It took a leap of faith for me to start my own company back in 2001. It was exciting to watch the small seedling that was my company germinate, take root and grow. The volume of work quickly exceeded our capacity and we began to hire employees and sign multi-year contracts. We nurtured and babied every customer. With a strong focus on providing technical expertise with phenomenal service, we soon grew to several hundred customers.

The Challenging Adolescent Years

And that’s when things got hard. Not every employee was the perfect hire. Not every customer was reasonable, nor did all of them pay their bills on time. As both the Chief Architect and CEO, I split my time designing highly available data centers while also securing financing and lines of credit to fuel the next stage of the company’s growth. We counted several top-15 e-commerce web properties and online marketing companies among our customers, including several with millions of daily transactions and billions in revenue. We grew faster than expected, meaning employees often bravely accepted responsibilities that they weren’t completely prepared for. Good employees rise to the occasion, but it certainly was turbulent at times.

As a first-time CEO, I include myself among the list of employees with more responsibility than ever before. I had to drive corporate strategy, negotiate legal terms, monitor cash flow, analyze markets, deal with angry customers, and ensure that we didn’t over-extend our resources. There were many pivotal moments where the company’s success or failure hung in the balance, and with it, the immediate livelihood of the employees and their families. During these times, stress and anxiety were off the charts. I found myself easily agitated and moody. I worked all the time. I wasn’t enjoying my family. My wife and friends wondered if I suffered from depression.

The Epiphany

Thankfully, I had a great support network. It was through this circle of friends that I got help. Several seasoned gray-hair types gave me perspective. I always considered my company my third child. This was my core mistake. A company is an asset, not a child!

A child is a person, with a beating heart, emotions, and the ability to feel both pain and love. A child is special and needs care, feeding, and connection. In return, a child gives wondrous joys and brings years of fulfillment. Every parent feels this – or at least felt it at one time.

A company is an asset – just like a car, a house, or a stock. Sometimes the asset serves you well and provides a fine return on investment. Other times, the car breaks down, the roof leaks, or the stock you bought loses value. When this happens, you either fix it or you replace it. Though many people spend hundreds of hours building up their car or perfecting their house, these assets don’t love you back. They serve you and we all need them, but they are inanimate objects and can be replaced.

I struggled with this concept at first, but I soon came to realize that life moves on even if your company doesn’t succeed. My wife and kids wouldn’t love me any less. Nor would their love be dependent on the size of our house or the material things in the house. Once I understood and accepted this concept, I was able to install healthier boundaries. I felt liberated. Don’t get me wrong: I still worked very hard to make the startup successful. I still shouldered the same weight, but I was now unencumbered. It was still a significant burden to bear, but I found much more peace and satisfaction with my daily life.

What to Do

We eventually sold our company, so in many ways it was a success. However, the business world is littered with stories of entrepreneurs who amassed small fortunes, but failed to find satisfaction or worse, lost their family in the process. A Google search on “deathbed regrets” is sobering. Click through the search link. Read several of the articles. Though death may seem far off for most, you shouldn’t wait until the end of your days to start living life to the full. Drawing healthier boundaries produces a harvest that you can enjoy now.

Every situation is different. Every founder has different skills, values and motivations. Every company has different strengths and weaknesses. But every employee in the company, from the largest stockholder to the entry-level new hire is a person. And every person needs to establish the right priorities to guide their life and their decisions. My advice to every aspiring startup founder is to seek a trusted group of seasoned and successful counselors to guide not just your company, but to guide you as a person first and an entrepreneur second.