Monthly Archives: October 2015

Investment rules

I was speaking with a friend working in Turkey’s private equity (PE) industry recently. We were talking about the upcoming financing rounds of our startups, and specifically looking to see which companies could be a fit for the PE fund.

As is often the case in our discussions with PE investors, we hit a roadblock when we started talking about the earnings before interest, taxes, depreciation and amortization (EBITDA) figures of our companies. PE investors traditionally look for companies with positive EBITDA.

They do so for two reasons. The first is that they’re less risky than companies with negative EBITDA, and the second (related reason) is that it makes it easier for them to finance the company’s growth through debt which can then be paid down using the free cash flow generated by the business. While free cash flow isn’t the same as EBITDA, companies with negative EBITDA are also likely to have negative free cash flow.

Since our startups are investing in their future growth, they rarely have positive EBITDA and this brings discussions to an end.

While PE investors’ desire to look for positive EBITDA companies is fully understandable, it’s interesting how such criteria can quickly be overlooked when investors are driven by a fear of missing out on the next big deal. For example, PE investors have started actively participating in the rounds of tech companies with negative EBITDA in the US. Examples include FanDuel and Artivest where KKR invested in the Series E and Series A respectively, and Zenefits where TPG invested in the Series C. Granted, with the exception of Artivest, these companies are approaching late stage territory. However, they still have negative EBITDA.

We have yet to see how the returns of these investments play out. Maybe PE investors will achieve great returns on their EBITDA negative venture investments, or maybe they’ll regret bending their rules. But they show that investment rules can be bent in environments where there’s excess capital in the market.


Long term company performance-based compensation plans

There are several different ways to implement a long term company performance-based compensation plan to attract, motivate, and retain key employees. I’m going to lay out the key questions you’ll need to answer when coming up with such a plan here, together with potential answers that I’ve seen applied in practice. I’m not going to suggest any specific “correct” answer because the right arrangement depends on the resources of your company and the specific employee behaviors you’re trying to incentivize.

What instrument?

Equity: These are actual shares in the business, together with the corresponding economic and voting rights of the share class. Employees are almost always given common shares that don’t carry any preferential rights like board seats or liquidation preferences.

Options: These are the right to purchase shares of the company at a predetermined price known as the strike price. In this case, the economic value of the shares that the employee receives if they choose to exercise the option is the share price minus the strike price. Because the employee only pockets the difference between the share price and the strike price rather than the full share price, option grants require a greater number of underlying shares to produce the same economic value as equity grants.

Phantom shares: I’ve only seen these used in Turkey, not in the US. They’re essentially rights to the same economic value as actual equity, but they don’t carry any voting rights. They don’t appear on the cap table but are included in the calculation of the distribution of the exit proceeds. Since their economic value isn’t awarded to the employee until the ultimate exit, they allow the employee to delay the tax liability which comes from receiving actual shares at each vesting date until the ultimate exit date.

How much?

It’s useful to think of how much long term company performance-based compensation to offer an employee based on their total compensation package. If we think of total compensation as a combination of salary, cash bonuses, and equity (I’m using this as a catch-all for the equity, option, and phantom share instruments discussed above), all else equal, the greater the employee’s importance and potential impact on the long term success of your company, the greater the weight you’ll want to place on the equity component.

For example, an entry level employee may be fully compensated through their salary and perhaps a small cash bonus. On the other hand, senior level employees who are necessary for and can make a significant contribution to the long term success of your company may have a compensation package with a greater equity weighting than a salary and cash bonus weighting.

As a concrete example, let’s take a key C-level hire to whom you want to offer a total $100K package. If we want 40% of their total compensation to come in the form of salary and cash bonuses, and 60% to come from equity, this implies a $60K annual equity component. Dividing this by the fair market value of the company (the last round’s valuation, together with an adjustment for the growth which has taken place since then can be a good proxy for this) produces the size of the equity grant. Assuming that your business is worth $30M, the employee gets $60K / $30M = 0.2% equity each year.

The reason why we use the fair market value of the company to determine the grant amount is because we want the economic value of the grant to remain the same if the company’s valuation doesn’t increase (making the grant’s exit value equivalent to its current time cash-equivalent value), while growing larger than its current time cash-equivalent value if the company performs well and its valuation rises.


There are two key components here. The first is the vesting schedule. This specifies when the employee will receive the equity. I wrote about founder equity vesting in an earlier post, and the same principles are valid for employee equity grants. So continuing with our example for the key C-level hire above, if an employee receives 0.2% each year across a 4 year vesting period with a 1 year cliff (the 1 year cliff is a pretty common industry standard, but I’ve seen anywhere between 3 year and 10 year vesting), this means that their total equity package is 4 * 0.2% = 0.8%. They earn their first 0.2% only upon completing their first full year at the company (the 1 year cliff), and the remaining on a monthly, quarterly, or annual basis until they’ve received the full 0.8% by the end of the fourth year (the 4 year vesting period).

The second component describes what happens due to differences in the timing of the exit and the equity vesting schedule. If an exit takes place before all of the employee’s shares have vested, there are three possible outcomes. First, the employee can get the economic value of only those shares that have vested. Second, the employee can get the economic value of all of their shares, including those that have yet to vest. This is called single trigger accelerated vesting because there is a single trigger, namely the sale of the company, which causes all of the shares to immediately vest. Third, the employee can get the economic value of all of their shares, including those that have yet to vest, only if the acquiring party terminates their role at the company post-acquisition. This is called double trigger accelerated vesting because there are two triggers. The company needs to be sold and the buyer needs to terminate the employee.

If an exit takes place after all of the employee’s shares have vested, there are two possible arrangements. Either the employee can be required to be at the company at the time of the exit in order to realize their fully vested share of the exit proceeds, or they can realize their fully vested share even if they’re not at the company. In the former arrangement, if the employee is no longer at the company at the time of the exit, they forfeit some of their shares. I’ve seen anywhere between a 100% forfeit (effectively requiring that the employee continue to work at the company until the exit date in order to receive any equity) and a 20% forfeit.

Best practices

We held our annual Portfolio Day this past Friday. This is a day where we bring together our portfolio companies around a specific theme. This year’s theme was Best Practices.

In line with the theme, our startups showing great performance in a specific functional domain shared their experiences and case studies from this function with other startups. Here are the areas where our startups shared their best practices:

The event was a big success. Instigated by the presentations, it was host to in-depth debates on a wide variety of topics. Some of the discussions which stood out included how to reactivate churned customers, how to build an engaged community from a naturally fragmented member base, and how to attract and retain the corporate misfits that are often necessary for a startup’s success.

At the end of the day, each startup is a series of experiments which take place with the goals of building a product that the market wants and then scaling it. However, in running these experiments, there are a series of functional best practices which increase the odds that your experiments will be successful. For example, there are tried and true ways in which you can run your recruiting, business development, and online marketing activities to be more likely to achieve positive experimental outcomes. And these best practices are often very different than those relevant for large companies. The best practices necessary to create the status quo are very different than those required to maintain it.

It’s therefore very important for startups with experience and demonstrated success in one functional domain to share this knowledge with other startups. This was the goal of our Best Practices Day. From the quality of the discussions that took place and the post-event feedback I received from our entrepreneurs, it seems to have achieved its goal.

Jack Dorsey

It was an exciting 10 days for Jack Dorsey. He was named CEO of Twitter on October 5. He then announced that Twitter is laying off 8% of its workforce on October 13. Finally, the other company where he serves as CEO, Square, announced that it is filing to go public on October 14.

What I found most interesting, however, is that Jack has already given 20% of his equity in Square to the Start Small Foundation, an organization created to support the local businesses that Square is serving. And he has committed to give an additional 50% of his equity to the same foundation in the future. While the success of these local businesses also contributes to the success of Square where Jack remains a large shareholder, Jack is placing his personal wealth at risk for the good of local business communities.

This is the type of CEO that I want to back. I own Twitter shares, and am very glad that someone with Jack’s values is leading the company.

Staying private for the right reasons

Mike Moritz is the Chairman of Sequoia Capital. His investments include Google, Yahoo, Paypal, YouTube, and Zappos.

Yesterday, Mike wrote a piece highlighting the advantages and disadvantages of being a private company with concrete examples. The piece is especially relevant in light of the growing trend for large tech companies to stay private.

Basically, it boils down to this. “Life in the shadows of the private market has many benefits for emerging companies. It allows them to experiment, work out kinks in a product, lure talented people with attractively priced stock options, shield themselves from the scrutiny of predatory competitors and stutter in private until they can speak fluently in public”. Staying private lets companies stay in control.

However in recent times, many companies are staying private not for these reasons, but to “conceal weaknesses, present an aura of invincibility and confound investors …”. They’re staying private not to avoid losing control, but because their performance wouldn’t live up to the discipline required by public markets.

Y Combinator investing more than pro-rata

I wrote about Y Combinator’s new billion dollar fund in an earlier post.

In that analysis, I shared my view that YC’s new fund needs to not only retain its pro-rata in the follow-on rounds of all of its companies below a post-money valuation of $250M (as announced by YC), but to “go one step further by also starting to differentiate whether and how much it follows on in each of its companies.” Specifically, I claimed that it needs “to start doing more than its pro-rata in winners and not following on in others.”

This past week, TechCrunch announced that YC will be leading the upcoming $30M+ round of background checking API service Checkr. If this is correct, since YC is leading the round, this will be an example of a company where YC invests more than its pro-rata.

It looks like YC’s new fund may indeed be performing the logical strategic expansion necessary for it to achieve greater returns.

Job longevity

I’m currently running the CTO search for one of our startups. As part of the initial phase of the search, I reviewed the LinkedIn profiles of 16 candidates with the right educational backgrounds and work experience for the role.

However, in addition to these job-specific requirements, I applied one more filter to the candidate profiles. I looked for candidates who have worked for at least two and a half years in at least one specific company. Notice that I wasn’t looking for the candidates to have worked for at least two and a half years in each of their roles. All I was looking for was one example of a company where they showed this longevity.

To my surprise, this longevity filter reduced the 16 candidates to 6. In other words, over 60% of the candidates I reviewed hadn’t stayed at even one company for more than two and a half years.

There are two reasons why you might not stay in a job for a long time. The first is if it’s the wrong job for you, in which case you made a mistake by joining the company. If this happens once or twice, that’s OK. We all make mistakes. But if this becomes a trend, it signals that you’re not correctly assessing the roles that best fit you, the people you’ll be working with, and where you’ll be motivated to perform.

The second reason why you may be switching roles very frequently is because you always think that the grass is greener on the other side. This is also dangerous. Understanding that every job has its ups and downs, and showing the commitment to fight through the down moments you face in a specific role, is necessary for your professional success, as well as the success of the companies you work for. If everyone jumped ship every one to two years, companies wouldn’t be able to execute on their long-term strategies.

For both these reasons, job longevity is a very important attribute to look for when hiring someone. Unfortunately, as my anecdotal research showed, it’s not easy to find these days. This makes those candidates that do show it that much more valuable.


Professional Writing Programs

Something written (“notated or documented”) in a fixed variety, in this case the form of a, is automatically branded. Goto the eCO site to join up digitally via the link in Resources below. You print it can even complete an online form and send it alongside clones of your function and $50 or. Relating Subject 17 of the U.S. Digital book or an ebook may be the digital equivalent of a printing book that is standard. Usually, you’re able to only prosecute for earnings and injuries. Whilst the publisher that is initial, you possess the trademark to your function from the moment it’s created.

But he refused and made a decision to focus on part time basis.

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(next section on why formulae ensure it is simpler to publish an article).

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AngelList SPV’s and Jobs

Yesterday, I wrote about the $400M fund that AngelList raised from CSC Venture Capital to invest in syndicate-led AngelList startups. AngelList actually made two more important announcements yesterday on its blog. Although they were lost in the frenzy of the very large fund announcement, they’re worth repeating here.

The first is a special purpose vehicle (SPV) product for angels and VC’s to quickly raise additional capital. This could be for a special large opportunity where the angel or VC doesn’t have enough capital to make the full investment on their own and needs to act fast, or in cases where they have equity ownership from an earlier round but don’t have the funds to retain their pro-rata in a later stage round. In both cases they can make their unfilled investment amount available to their LP’s and AngelList investors in exchange for carry.

AngelList’s SPV product brings two key advantages. First, the cost of administering the SPV is reduced from the traditional tens of thousands of dollars to ten thousand dollars by using AngelList’s existing SPV infrastructure. Second, the product gives SPV creators access to a whole new group of AngelList investors that they can raise money from, while also introducing the SPV creator’s LP’s to AngelList. Such SPV’s were already being launched on AngelList but formalizing the program is likely to accelerate adoption of the product.

The second is an AngelList Jobs App for iOS. While AngelList’s startup-investor matching platform gets more attention than its startup-employee matching platform, the latter is an equally important tool for startups. Money is of little use if you don’t have a great team and AngelList helps you build this team.

The Jobs App works just like Tinder. If you’re a company, you specify what employee attributes you’re looking for. The search results are presented one by one and you swipe right to skip the candidate, and swipe left to be introduced. If you’re a candidate, you specific what type of companies you’re looking to work for. When the search results are displayed, you swipe right to skip the company and left to apply to the company.

I think that the Tinder-like interface is a touch too superficial to evaluate the important attributes necessary to properly select someone to work for you or a place to work, but it’s a promising starting point. The current casual discovery of candidates and companies will likely be augmented with additional features as user feedback comes in.

AngelList raises a $400M fund

AngelList recently announced that it is raising a $400M fund from CSC Venture Capital, the venture capital arm of a Chinese private equity firm, to invest in startups that raise money on AngelList. The money won’t be invested all at once. $20M will be placed in the first year, followed by a growing amount up to $50M in subsequent years.

To give you a sense of the impact of this fund on the investments which take place on AngelList, we need to have a sense of how much investment activity is currently taking place on the platform. In its 2014 year end review, AngelList shared that $104M was invested through its online platform.

It’s safe to assume that AngelList’s new funds will go towards existing startups that received investment on AngelList, rather than new startups, because these are the startups that investors deemed worthy of investment. This means that roughly 20% of the investment volume which took place on AngelList last year will now be performed directly by AngelList rather than syndicate leads and syndicate investors. This will grow to 50% of the investment volume in future years.

This analysis assumes that the total amount of funding which takes place through AngelList stays steady at around $100M each year. This figure would fall if there’s a short term decline in investor appetite for tech startups, but it’s likely to grow over time as the tech sector’s importance grows and AngelList’s disruption of the traditional venture capital model deepens.

Syndicate leads are unlikely to lower their share of each investment they make since they provide access to the startup through their relationship with the founder. So syndicate investors are likely to be the ones who are crowded out.

However, there will be a limit to AngelList’s fund’s ability to crowd out syndicate investors. Syndicate investors are fragmented and this gives syndicate leads the ability to set their deal terms, specifically their deal carry. The greater the fraction of a syndicate’s total investment which is taken by AngelList’s fund, the more power AngelList’s fund will have to influence the deal terms. Since syndicate leads won’t want to lower their deal carry, they’ll want to continue to include smaller investors with less negotiating power in their syndicate. And since AngelList relies on the deal flow and access of syndicate leads for its success, it will need to balance its desire to allocate more of its own funds with the demands of its syndicate leads. So, although less than before, there will still be room for smaller syndicate investors.

It will be interesting to see if the deal terms for the AngelList fund diverge from those for smaller syndicate investors making the same investment. While AngelList will in many cases be able to negotiate better terms for its larger ticket size investments, doing so would hurt its relationship with the smaller syndicate investors that it has supported so far. However, the simple laws of supply and demand may win out in the end. This makes the prospect of tiered deal terms based on an investor’s ticket size a real possibility.

I look forward to seeing how this plays out in the coming years. As is the case for all forms of technological disruption, consumers (startups) will be the ultimate winners.