I met with an angel investor recently who asked me, “what do you want to get out of Sportaneous — do you want to run this company for the next 20 years and be with it forever, sell it as quickly as possible, or something in between?” He went on to explain that the answer to this question is important for investors, for a variety of reasons.
First off, every VC and even most angel investors expect a 5x-10x return on their investment, so they want to be sure that the entrepreneurs they fund are motivated by HUGE (and not just big) opportunities and potential outcomes. In other words, a person who simply wants to create a modestly successful business, which he can sell for a modest profit is not the kind of entrepreneur an angel investor or VC is interested in. They want somebody who is really shooting for the sky and determined to do whatever it takes to get there.
That having been said, the other extreme…
An NDA, or nondisclosure agreement, is a document that I find fascinating. The basic idea behind an NDA is simple – if you are about to discuss confidential information with a party who may be able to help, but who may potentially ‘steal your idea’ or share it with other parties, you can get them to sign an NDA which legally prohibits them from sharing the information you share with them to anybody else.
Legally the NDA is not very interesting – it basically says exactly what you’d expect: that the party signing it must keep the information discussed confidential, not use it for their own purposes, not disclose it to anybody else, and that they must return any company materials to the company without making copies for themselves.
Much more interesting than the provisions of an NDA are people’s reactions to them in the startup world, and the subtle implications behind them. Many VCs and people you would want to sign NDAs refuse to, and the more I have learned about starting a company the more I understand why.
One thing almost every entrepreneur with experience learns is that “ideas are cheap, but execution is expensive”. In other words… Continue reading »
‘Vesting’ is one of those legal terms you’ll end up hearing a lot if you hang out in the “startup scene”; the point of this post is to explain what vesting is, and more importantly, why it matters.
What is vesting?
It’s probably easiest to think of ‘vesting’ as analogous to ‘earning’; if a person’s RSPA (restricted stock purchase agreement — basically the contract you sign when you are being issued equity) specifies a four year vesting schedule this means that this person must earn his shares over a four year period, by working for the company in whatever capacity has been agreed upon, rather than receiving all of his issued shares immediately after signing the RSPA. In other words, if I give you one million shares with a four year vesting schedule, and you end up leaving the company after two years, you are legally only entitled to five hundred thousand shares, since you only earned 2/4 or 50% of your shares.
A very typical vesting schedule (at least when I was working at a law firm in Silicon Valley) is four years with a “one year cliff”. I’ve already discussed what a four year vesting schedule means; the ‘cliff’ is the point at which the shares begin to be issued.
Allow me illustrate by example. Suppose I issue you one million shares, and your RSPA specifies a four year vesting schedule with a one year cliff. The four year vesting schedule, as we discussed, means that you earn your one million shares over a four year period (earning 250,000 shares per year). The one year cliff means that you do not earn ANY shares until the one year mark has passed, at which point you are issued 25% of the shares (250,000 shares in this example). After the one year cliff has passed, you will continue earning your shares, typically on a monthly basis so that if you work for the company for two and a half years, you will earn that proportional number of shares (i.e. 500,000 for the first two years plus 125,000 shares for the first six months of the third year). But the one year cliff matters insofar as a person who works for 11 months and then either quits or is terminated earns NOTHING.
A four year vesting schedule with a one year cliff is not the only kind of vesting schedule; a cliff is optional and you may choose however long of a vesting schedule as you’d like. In rare cases we have, at Sportaneous, issued vesting schedules as short as a few months, for people that preferred equity to cash but who were only willing or able to contribute for a short period of time.
Why is vesting important?
Vesting is one of those things that almost everybody with legal or startup experience agrees…
Aspiring entrepreneurs sometimes ask if I have any ‘tips’ or ‘tricks’ on starting a company. My response is usually “it depends” – since startup concepts vary so widely, my answer will typically be very different for a biotech startup that requires millions of dollars in funding to get things started compared to a educational nonprofit startup. Despite this, the one universal “tip” or “trick” I have shared with nearly all entrepreneurs is the importance of selecting a good board of advisors.
First, let’s get one thing straight: a board of advisors is NOT a board of directors. The latter is a legal requirement for corporations, whose responsibilities are clearly defined by law. A board of directors is usually just referred to as “directors” and the number and kinds of directors is an important component of a corporation.
In contrast, a board of advisors is…
My last post discussed how I think a convertible note is the optimal form for an entrepreneur looking to raise seed stage capital, who anticipates VC money down the line, but who is not quite ready for it yet. This post will explain what a convertible note is, what the terms are that matter, and briefly highlight the (fairly recent) debate over whether a convertible note with a cap is better or worse than a priced equity round.
First: What is a convertible note?
Let’s break the term down into its components.
First, it is a “note” – which means the investor has the option of getting his money back at a specified date in the future with some interest (the specific interest rate is one of the terms that is negotiated).
Second, it is “convertible” – which means…
If you are reading this post, I’m going to assume that you have already chosen a legal form — hopefully a Delaware C corporation if you anticipate VC money down the line, as I discussed in my last post. I’m also going to assume that your company is now just barely past the ‘concept’ stage – you have your idea, you possibly have a prototype, but you do not have a working ‘final product’ or revenue, and need time to get to that stage.
Although these days it is not terribly expensive to start a company (especially a tech company with a technical co-founder), the old adage ‘you’ve gotta spend money to make money’ certainly rings true to an extent, and your next decision is how to go about raising some money – also known as “seed stage capital” in startup/VC lingo.
I think it’s called ‘seed stage capital’ because…
If you are reading this, you have finally had that ‘light bulb’ moment and are ready to take the plunge into entrepreneurship. Congratulations! This is sure to be one of the most exciting experiences of your life and you will certainly learn more than you ever imagined from this journey. You will face numerous challenges but if you keep your passion and determination alive, you will succeed, or at least come out of it stronger, smarter, and more likely to succeed with your next big idea.
Putting aside my vague words of congratulatory encouragement, let’s move to the first practical consideration you will face: what legal form should you choose for your startup?
The answer, like most legal answers, is “it depends”.
Since there is a wealth of information about this topic online (I provide URLs throughout this post that point to the most helpful sources I’ve found), I am going to write this post to explain why, for internet entrepreneurs (like myself) who expect to receive venture-backing sometime in the near future, a Delaware C corporation is, in my view, the best choice.
First let’s review…
Follow Me!