The Meeting of the SuperMentors

It was a dark and stormy night. In a secret lair hidden far far away from mere mortals, the SuperMentors of 500 Startups convened. They came from all over – Gotham, Metropolis, the planets Vulcan, Cybertron, and Naboo, and The Shire. In just a few hours, they devised a master plan for world domination. That and some killer ideas on how to help the startups of 500 Startups go to infinity… and beyond!

Such an affair can best be documented in picture form:

Mentors mingling

After a long day of saving lives and fighting crime, the SuperMentors arrived to the secret lair understandably famished. They recharged with sustenance and invigorating conversation.

David Shen listens intently

The Incredible Hulk (aka David Shen) talks shop with fellow SuperMentors.

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Daredevil (aka John Zeratsky) reunites with old partners in crime.

Great turnout!

The secret lair is PACKED. SuperMentors ready to roll.

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SuperMentors listening intently to the 500 Overlord.

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Thor (aka Bradley Heilbrun) and The Punisher (aka Rick Boardman) duke it out.

Cybertron found a nice hideaway in the Gunderson kitchen

SuperMentors divided into smaller groups to brainstorm. Team Cybertron had a lively discussion.

Gotham clustering

Team Gotham searching for truth, justice, and the 500 way.

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When this much AWESOME and POWER congregate in a single location, not much can be done to contain that – as evidenced by the excitement generated in the Twittersphere by the SuperMentors:

@elliotloh: The last time I saw a group like this was the incoming college hires at my first job. This time everyone has a track record. @500startups

@bwitlin: Hey @davemcclure, looking forward to the superfriends meetup tonight @500startups #letthegamesbegin#icallmysecretpowerislasereyes

@shaherose: I spy at least 4 kick ass canadiens here @500startups mentor night!

All in all, it was a fantastic event. We are indebted to the SuperMentors for their passion and commitment. The world waits with baited breath to see them use their superpowers to help the startups of 500!

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Making Your Startup A Platform

Meet Green Lantern, aka super-mentor Ben Lewis. Ben is a co-founder and VP of Product at Tapjoy, a platform offering mobile publishers solutions for application discovery, rich advertising, and virtual good sales. Before life as an entrepreneur, Ben was a product manager at Google and worked on consumer products such as Toolbar, Search, and Checkout. Ben was also an engineer on the original Xbox Live team.

As one of the cofounders of Tapjoy, I hear a lot of ideas for iPhone and Android based companies. These ideas usually fall into one of the following two categories:

 

    • I’m going to build an app or game

 

    • I’m going to build a platform or ad network to help other developers

 
The $100M question is which method is the best way to build a successful company. In short, I don’t believe there is a universally right answer to that question. But having been on both sides of the ball I’ll describe some of the pros/cons to each that I’ve seen and share my experience with Tapjoy.

How Tapjoy got started
Tapjoy started out as an idea between my co-founder Lee Linden and me. In the summer of 2008 we decided to build an iPhone game. We knew the market was growing and saw people making hundreds of thousands of dollars even though the app store was only a few months old. So we started designing a tower defense game that would eventually launch as TapDefense. Three months and a lot of hard work later our game launched. It’s a story that has been repeated thousands of times since then by developers across the world. However, we were fortunate enough to see our game rise quickly to the #1 overall position in the Top 25 Free Apps list where it remained over Christmas and generated over six figures in ad revenue that month. Not bad for two guys doing this in their spare time.

It was that Christmas break where we decided to pursue Tapjoy full time. I quit my job when I returned to San Francisco in January and Lee joined me soon after. Of course, the big question remaining was how to grow our business. We started by building tools to maximize our revenue:

 

    • An ads mediation platform to improve ads revenue

 

    • A cross-promotion engine to increase the viability of new titles

 

    • High scores

 

    • A virtual goods store (this ended up being our most successful tool by far, leading to a 4x increase in revenue over banner ads)

 
Some of the developers we knew asked us about using these tools in their titles so we bundled them into a library that we could offer. At first this was something we only shared with a few close friends, but it quickly expanded to dozens of apps, then hundreds, and now thousands.

Today the focus of the Tapjoy platform is a virtual goods and virtual currency monetization system. We help games and apps with virtual goods make money with an alt-pay system. For users who are unwilling or unable to pay through in-app payments (many iPod Touches for instance have no credit cards associated with their account), the users can complete a marketing action in order to earn those virtual goods. These marketing actions translate directly into dollars flowing through Tapjoy to our publishers. By far the most successful marketing action is to download another app. Even developers of free apps are more than happy to pay for these incented installs. And today, with hundreds of live publishers and thousands of live advertisers (app developers), Tapjoy is the #1 paid app distribution network on the iPhone and Android platforms.

A few things I learned in this time
While both are challenging, I will say that it certainly isn’t as easy to build a platform as it is to build a single app/game. But the upside is that you have reduced risk. Assuming you can get partners on your platform, it’s only natural that some of these titles will be hits, thus giving you enough exposure to be successful. That much we realized back in the early days of Tapjoy. But here are some things we didn’t understand until living through them:

 

    1. You are always selling. The success of your platform depends on the number of partners using it. Even if you’ve never spent a day of your life in sales, be prepared to start. At a small company everyone needs to pitch in and help grow the business. Conferences, parties, reunions, etc all make great opportunities to add to your sales. When even a single partner can materially affect your overall numbers, it’s important to make a sale at any opportunity.

 

    1. You are always on call. When your big partners (or your small ones) have a portion of their business dependent on your company you need to be available 24/7 to support them. Our (admittedly small) company couldn’t take a real vacation until after we were acquired and added much needed troops to our workforce.

 

    1. Reputation is key. Want to raise a Series A round? Any serious VC will be contacting your partners to see what kind of platform you run. Want to get acquired? Same deal. This is a very open community and the people you’re looking to for an investment or acquisition will know someone who is working for you. When we were looking to expand we had many of our big partners tell us “X was asking about you. We said good things.”.

 

    1. Cash is key. One very important thing to keep in mind if you raise little or no money (like we did) is that when you get paid and when you have to pay are two totally different things. As a small company you aren’t in a great position to demand strong payment terms by your partners. If you want to work with big companies like Google or Microsoft, you’ll get paid when they want to pay you. And that can sometimes mean 60 or 90 days after you’ve spent their money. Likewise, if you’re paying out partners they often demand payment within 30 days or less. If you’re not careful this can create a cash flow situation where your bank account dwindles as your platform grows. We were able to mitigate this problem by capturing a higher volume of small company partners rather than a lower volume of large company volumes. The small companies tended to pay quickly which overshadowed our accounts receivable for the larger companies, keeping our business cash flow positive. If you don’t have the luxury or fortune to depend on this I highly recommend raising more money or negotiating accounts receivable based bank loans.

 
When it works
Perhaps the biggest benefit of all to running a platform is watching other people’s businesses grow and knowing you’re helping to make that happen. I’ve been able to write very large checks to partners I now consider my friends.

As tough as it is sometimes when your partners are upset or your servers are crashing, it can be a pretty amazing experience to embark on building a platform that powers other startups like yourself.

Tapjoy was acquired by Offerpal Media earlier this year, which has since re-named itself to Tapjoy. You can check out a video interview of Ben and his co-founder Lee here.

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Blogging Is Like Oxygen

This morning, I came across a couple blog posts today on the topic of having a blog (yes, very meta):

 

 

Reading these made me take a step back and reflect on the 500 Startups Blog, as well as other corporate blogs I managed while I was at Google and YouTube. Everyone seems to include a blog and/or Twitter account as part of a big launch checklist. After the big announcement, more often than not these two properties start to gather cob webs because blogging and tweeting aren’t considered high priority. To me, this is a huge mistake. If you’ve neglected your blog, either make time for it or hire someone to be its editor-in-chief and give it the attention it deserves. If you don’t have a blog, get one and start writing.

Corporate blogs accomplish one or more of the following goals. In no particular order:

 

    1. Be the source of company news & announcements – product launches, events, etc.

 

    1. Demonstrate thought leadership – a fancy way to say that the blog will produce unique content relevant for the company’s customers. This might be tips, best practices, case studies, yada yada.

 

    1. Be a channel through which the company positions itself and shows its culture… i.e. some personality!!

 

    1. Become its own micro-community. Oftentimes blogs are made that much more valuable because of the active community and commenting that happens with each post.

For 500 Startups, all of these goals apply to us – especially #3. Being open and transparent is very important to us, and our blog will help us stay true to that. The type of fodder we tend to post about includes the latest news with 500 Startups, share the immense amount of experience and tips possessed in the minds of our mentors and startups, cool things our startups are doing, the evolution of the 500 Startups work space, and much more. While we want to show the world what we’re all about, I think a more important goal here is that our blog content actually be helpful to people and not just marketing fluff.

I’ll close with a few specific tips I’ve found to be useful when running a blog. There are a ton of things I could list, but I’ll keep it short and tangible:

 

    • Create a blog pipeline that shows upcoming posts, when they’re scheduled to go out, and current status. I like to do this with Google Spreadsheets and/or Google Calendar, but whatever tool(s) you prefer is fine. Just as long as you have some sort of schedule.

 

    • Post at minimum 3xs/week.  If you’re up for the challenge, then try to post every day.

 

    • Establish topics what you will/will not post on your blog. This is good to do from the beginning, before your blog is live. It helps give a sense of purpose for what you want to use your blog for and how it’s going to help your company. It’ll also help you curate content.

 

    • Designate an editor-in-chief. Have one person who owns the blog. It is critical to have someone serve as the editor-in-chief and manage the schedule, curate blog post topics, edit for style/tone/grammar, and grow readership.

 

    • Syndication is king! Make sure your blog RSS works, your posts have “Tweet This” and Facebook “like” buttons and other sharing mechanisms, have a email subscription feature, etc.

 

    • Don’t be a robot. If people comment on your blog, respond back to them. This goes for Twitter too.

 

    • DON’T BE BORING. There are TONS of blogs out there. You’re competing for people’s attention. Step out of your comfort zone and don’t be afraid to shake things up.  I wrote the first version of our official mentor announcement. It had all the right content, but it was pretty dry and standard. Dave said, “Let’s do SUPERHEROES!!” I thought he was crazy. But it was perfect. (It also gave me a chance to sneak in some Big Bang Theory references… did you catch them??). The best part was when mentors started tweeting out their superhero alter egos.

And with that, I’m off to find myself some lunch! Would love to hear your own blogging tips – post a comment or @-reply me.

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How to (Sustainably) Make the Startup Office More Livable

Meet one of our super-mentors, Captain Underpants (aka Dave Schappell). In his own words: “I’m the founder, CEO and door-desk-builder at TeachStreet – a Seattle-based local/learning startup, helping people find great local (and online) teachers/schools/classes, and helping those schools and teachers with effective online advertising/lead-gen/payment processing tools.”

In this post, Dave talks about how to make your startup office space livable while not breaking the bank.

Let’s face it – all pre-entrepreneurs dream of a garage-, basement- or coffee shop-catalyzed startup, run with a frugal mindset and a just-do-it mentality (we all hate The Man and his cubicle farms, right?!?)  And a huge percentage of startups do just that, for a few days, weeks or even months.  But after the shine wears off, you start longing for a little bit of space between work and loved ones (or fellow coffee patrons).

This post helps share some best practices that we learned along the way.

1. A (nice) office doesn’t need to cost you a lot.
We’re in downtown Seattle, next to a Whole Foods, and in the same area of town as the new Amazon.com headquarters.  We’re paying $13 per sq ft (per year), at the same time as other startups are blindly paying in the $20s.  That gets us a nice 1,700 SF space that we comfortably fit ~10 employees, plus a number of non-employees (who we charge per-desk fees… see #10 below).  So, that’s $1,842 per month (before netting out our subleases) – yes, that’s not ‘free’, but it’s not bank-breaking either.

2. Get a Real Estate advisor/rep
I honestly don’t know how they make money (I assume they get a % of the lease amount, and are busting their butts because they know that some of these startups may become the next Google), but our Real Estate advisor/consultant/tenant rep is awesome – find one like him near you.  He represents the biggest companies in town, but treats our little startup the same.  Benefits include finding us all available space, negotiating down rates (as much as 30% off list price), and helping with any lessor issues.  You’re foolish not to have someone manage this for you.

3. Office furniture can be acquired cheap
I know everyone already knows this, but Craigslist is amazing. We outfitted our original office for less than $200, not including desks. We also bought some raw materials andassembled a number of door desks in a few days. It probably wasn’t worth the sweat and labor vs. IKEA, but it’s still always cool to have a door desk, no?

Video of team during construction below. (Doesn’t that look like fun?)

4. Snacks!
Early on, we asked the team what could make the office a little more palatable (pardon the pun) during the long work hours/launch sessions.  Their answer was “snacks would be nice”.  I was shocked at how easy this one was to say “yes” to – for less than $75 a week (a tiny amount compared to salaries), you add some variety and a ‘perk’ that you don’t/won’t find at larger companies. It’s crazy that more companies don’t do this!  We made this less of a chore for any one person by having the responsibility for ordering shared among all co-workers (one person gets snacks each week).  That allows for some personal preferences to be accommodated, and it makes it a community task that’s sort of fun.  (Note – AmazonFresh delivery service makes this one quite easy)

5. Paint & Comfort-ize
After inhabiting our office for over a year, someone commented that it felt a little like an asylum, with white walls, no comfortable furniture, no decoration, etc.  So, one of our more creative souls picked out a bunch of paint swatches, bought some supplies, and we made a day of no-TeachStreet-work and got to painting, couch-buying and decorating – end result looks pretty sweet, if we do say so ourselves, and we all did it together!

6. Cleaning Weekly
In addition to sharing ‘snack duties’ each week, we also have one person responsible for emptying the sink (when the elves magically leave dirty dishes without cleaning them…), emptying odoriferous trash cans, excess garbage, etc. We occasionally ‘splurge’ on a cleaning service (about once a week). It costs all of $150/month (<$40/week) for this extravagance, but it removes the need for anyone to sport the vacuum cleaner.  Trust me, this one’s worth it.

7. Weekly celebrations (yes, make it happen every week!)
Beers on Friday afternoons, along with some ping pong, music, and fun. In addition, we have a quirky team exercise where a different team member teaches everyone else ‘something new’ each Friday (it fits with our TeachStreet brand/mission) – almost all startups can find something that fits with their mission too.  It’s nice to not talk about work, and unwind a little bit before the weekend (when even more work often occurs).  And, we share beer-buying duty too… usually the same person who’s ‘Teaching Something New’.

8. Reward (TV, music)
We recently pondered moving to a new neighborhood, which would mean an increase in $/sq ft but a reduced commute for many of us.  We decided against it, for a variety of reasons.  But we still wanted to celebrate a string of recent successes.  We chose to pimp up the office a bit more – voila, a $749 big-screen (from Costco) and a $300 Sonos for group music – pretty sweet, eh?  And, you can follow our kick-ass shared TeachStreet Last.fm music channel (any terrible songs are courtesy of our CTO @daryn and his warped tastes)

9. Dogs. Arf!
If you’re the dog-loving variety, include them in your lease.  Just be sure to make dog owners accountable for cleaning up after any messes.  And, if anyone is allergic to dogs, fire them. (Just kidding. Or am I?)

These are our security dogs, Zach the Dog and Stella the Frenchie. (By the way, isn’t Stella much cuter than Nickey, the ferocious 500 Startups guard pug?)

10. Sublease
Invariably, most of you will lease a space slightly larger than what you need.  You’ll also happen upon fellow entrepreneurs who only need 1-2 desks until they validate their business and/or secure some funding.  Share some of your space (and get some other entrepreneurial energy in your office)!  We charge a below-market $250/desk to a few folks, and thus reduce our net out-of-pocket rent expense to <$1k.  And, yes, we’re a venture-funded startup, but we see no reason to waste that $ on things that don’t help customers.

I’m sure I missed a bunch of other great ideas, so please share yours in the comments below.

I hope that some of the above helps you to make the jump to your own World Headquarters in a way that doesn’t strain your resources. You’ll be amazed how many of your friends are envious of your office. It’ll hard for them to hide their jealousy when they wander in and experience the energy behind an organic startup space, complete with dog!

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Acquisitions: Pulling Back The Covers – Part 2

500 Startups Mentor Ryan Junee continues with Part 2 of his thoughts about startup acquisitions. Catch up on Part 1.

This is a continuation of my previous post in which I talked about some of the key things you and your team need to think about when deciding to sell your company. In this post I will describe the actual negotiation process and some of the important terms you will need to know.

Negotiations

A lot has been written about negotiation strategy and tactics, and I’m far from an expert, so I’ll let you research the general stuff on your own. In the context of a potential acquisition, the first thing you need to do is get a strong internal sponsor/champion at the acquiring company. This is probably the person who found and approached you, unless that person is not very senior in which case it may be his or her boss, or further up the chain of command. Usually it’s someone in the product or engineering team who really understands what you have achieved, and really wants you to be part of the company. Find this person and do everything you can to make them love you. They will be the one who tells the M&A team to go ahead and get a deal done.

You will probably have a bunch of meetings at the company demoing your product, talking about the technology and your shared vision. Hopefully there’s a strong synergy between your vision and theirs. Hopefully they like your architectural choices and the technology stack you have chosen. Hopefully they are impressed by how much you have accomplished with so few resources (this is where startups really shine compared to large companies). If all goes well, at some point you will be introduced to the M&A team, sometimes called the corporate development team, who will take over and handle the tactical negotiations from here on.

Acquisition negotiations are a strange things. At first no one seems to come right out and say just what is going on and what the purpose of the discussions are. Often companies are just ‘exploring how we could work together’ – but there seems to be a shared understanding that a potential acquisition is really what’s being talked about, and eventually someone, usually from the M&A team, will come out and say it. This is when things move into high gear!

You’ll want to quickly assemble your team of lawyers and advisors (which I discuss below) who will help you through the negotiation process. Before you have this team assembled, there are a couple of things you should make sure you do from the beginning to start out on the right foot. First, don’t immediately sign a no-shop agreement. A smart acquiring company will ask you to do this right away, but you need to resist. Explain that you’d be happy to sign an NDA and keep the details of your discussions confidential, but you aren’t ready to sign a no-shop agreement until the discussions progress and you have a better understanding of the actual terms. In my opinion it’s ok to sign a no-shop once you have agreed on a termsheet, but before you reach that stage you should not.

Secondly, have your BATNA ready (“Best Alternative to a Negotiated Agreement”). You need other options if you are going to have any leverage in the negotiation (again, much like dating 🙂 This could be other interested acquirers (which is why it’s important to not sign a no-shop agreement, so you can go out and get in front of other acquirers now that you have interest from one), it could be investors interested in funding your company so you can continue independently, or it could be simply walking away and continuing to do what you do best. You have to show that you don’t need this deal, make them want you as much as you want them. And even if you don’t have other options yet you need to be projecting this attitude.

The negotiations will progress through a few phases. There will be a due diligence phase where the acquirer digs deeper into your product and technology. They may even put you through a formal interview process (since they are basically hiring you). Next you will begin negotiating a termsheet – a short document (usually 4-6 pages) that outlines the key terms of the deal, and streamlines the process by ensuring you have agreement on all the important stuff before engaging expensive lawyers (I talk about some of the key terms below).

Eventually you will reach agreement and sign the termsheet. This could happen relatively quickly over a week or two, or could drag on for a couple of months depending on how closely your expectations match and how hard you negotiate. Term sheets are not legally binding, but they aren’t usually broken if both sides have been honest in the negotiations thus far. For this reason (because the deal has a reasonably high likelihood of going through), it’s ok to sign a no-shop agreement at this point.

The final phase is negotiating the definitive agreement. Whereas a termsheet is only a few pages, the definitive agreement may be well over 100, and is mostly legalese that lawyers on both sides will relish the opportunity to argue over. Depending on how thorough you were at the termsheet stage and how hard you decide to negotiate, this phase could again drag on for months.

If the deal doesn’t fall through, then at some point everyone on both sides is happy and signing day arrives! After penning your autograph on stacks of documents you can sit back, relax and let your writers cramp subside. But you’re not quite done yet. Usually there’s a bunch of administrivia that needs to be taken care of after signing and before the deal is officially ‘closed’. This can take a few days or a week or so. Closing day will eventually arrive, you’ll login to your online bank account and a huge smile will appear on your face, techcrunch and a hundred other blogs will write about you, and you will join the ranks of entrepreneurs who have successfully sold a company.

Of course come Monday you’ll have a new job and a new adventure to embark on, so relax while you can.

Lawyers and Advisors

I mentioned above the importance of assembling your team to help with negotiations. This basically boils down to lawyers and advisors. I first want to explain that lawyers and advisors are very different – you need to make sure you have both. To put it simply, lawyers are focused on minimizing risk. They will pore over the details of an agreement and make sure you aren’t exposing yourself to things that could come back to hurt you. They want to protect you. What lawyers generally won’t do is present you with creative ways to reach a better outcome. As an entrepreneur, you are not only interested in minimizing your risk, but also in maximizing the upside of the deal. This is where having experienced advisors is key. Hopefully your advisors have done a few deals in the past and have a few tricks up their sleeve that that can be used during negotiations. To give an example, one of our advisors was a very experienced tax accountant and figured out a way to structure the deal that helped us minimize the tax we would owe to the government. Venture Hacks explains this well in their article Lawyers are referees, not coaches.

In case you are wondering whether you can just do this yourself – why you need a team at all: first, it would be absolutely crazy not to have a legal review of the agreement you are about to sign, preferably from a lawyer experienced in dealing with these sorts of transactions (not Uncle Bob who has a small family law practice back home).  Secondly, consider that this is probably the first time you have ever sold a company.  Your acquirer may have already acquired dozens of companies this year!  The M&A team you are negotiating against lives and breathes this stuff every day.  You are at a massive disadvantage if you don’t bring some experienced folks to your team to even things up.  It’s particularly advantageous to have advisors on your side who personally know executives on the other side.  Having a back-channel in addition to your formal negotiations can be tremendously useful in streamlining the whole process.

I talked about the negotiation process above, and how moving from term sheet to definitive agreement can last a month or more. This is the time when your lawyer really becomes engaged, and is the time you need to be very careful about where your lawyer spends his or her time (aka billable hours). It’s often joked that lawyers are the ones who make out best in an acquisition. Legal fees are high, and lawyers just love arguing over minutiae and charging you for it. You will have to actively manage your lawyer, keep them reigned in and focused only on what you mutually decide are the most important points. Set an expected budget upfront. Ask what they can get done for this amount. Tell them not to worry about arguing over minor points that you don’t care about. Keep in mind that they are probably used to negotiating big deals where legal fees can easily run above $500K, they aren’t necessarily used to your small early stage exit. Legal fees of $50-$100K for an early stage deal are not unusual.

The Nitty Gritty

Here I’ll outline some of the key terms you will be negotiating. Again, I’m bound by confidentiality agreements so I won’t be discussing the specifics of my deal, but just some general terms to give you an idea of what to expect.

 

    • Consideration – the amount you will be paid, the form it will take (cash, stock or both), how it will be paid out (usually some percentage up-front and some percentage over time tied to continued employment, perhaps tied to milestones)

 

    • Structure of the deal – usually either a stock purchase or an asset sale. You should consult your lawyer and tax accountant on how this will affect you.

 

    • Employment arrangements – the types of jobs founders will be offered and an indication of salaries etc

 

    • No competition – an agreement preventing the founders from competing with the acquirer for some period of time

 

    • Non-disclosure – requiring parties to keep terms of the deal (or maybe even the fact a deal exists) confidential

 

    • No-shop – preventing the company from meeting with other potential acquirers or investors for some period of time (usually the expected time for the definitive agreement to be negotiated).

 

    • Due diligence – outlining the information the acquirer will need from the company.

 

    • Indemnification – outlining the representations and warranties the company is making to the acquirer, and requiring the company to reimburse the acquirer if they are sued for any breach.

 

    • Escrow – some portion of the consideration may be held in escrow for a period of time to cover the indemnification mentioned above.

 

    • Expenses and fees – who is responsible for legal fees (usually each party pays their own, but you may be able to play the ‘starving entrepreneur’ card and get some help)

It is important to understand all of the terms in your term sheet before signing. I would recommend paying specific attention to the structure of the payments and possible tax consequences. As I mentioned we were able to structure our deal in a way that helped minimize taxes owed.

While negotiating the definitive agreement, your lawyer will really dig into the indemnification clauses and make sure you aren’t signing yourself up for more risk than necessary. To give you an idea, you will be asked to represent that you fully own all your IP, have not breached others intellectual property rights, have not made any fraudulent claims etc. In order to satisfy these representations, and as part of the due diligence process, you should expect an audit of all the code in your product that was written by third parties, which includes all open source libraries and the licenses attached to them. You need to make sure you clean from an IP perspective.

Keep Working

I’ll end this post with one piece of advice that was drilled into us by Paul Graham, one of our advisors. Keep working. Assume that the deal is going to fall through (deals often do). Keep building the company, developing new features, gaining new customers etc. Not only will this leave you in a comfortable position if the deal actually does fall through, but it will also help with your negotiations when the acquirer sees your company continuing to grow during the process (which may be several months). In our case we launched several new features and received a bunch of press during the negotiations, which I assume helped reassure the acquirer that they were making the right decision.

I hope this post has pulled back the covers and shed a bit of light on the acquisition process. If you are going through the process, I’m happy to answer any questions – drop me an email.

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Warm Gun will be live streamed – tune in this Friday

Our first 500 Startups event, Warm Gun, is only a couple days away!

For folks who can’t make it in person, we’ll be live streaming the event. So you can check out all the great sessions from wherever you are. The URL to bookmark:http://bit.ly/warmgunlivestream

Be sure to follow @warmgundesign for all the latest Warm Gun info, including day-of live tweeting and presenters’ SlideShare presentations! And our event hash tags will be #warmgun and #warmgundesign.

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EXTRA! EXTRA! Lex Luthor, Tony Stark, Jean Grey, Bruce Wayne to join 500 Startups “Brain Trust” of Mentors

Coming Soon: 500 Startups HQ Talks on Mind Control, Blind Dates for Telepaths, DIY Holodeck

ZAP! KAZAM! POW! A super-secret society of powerful tech-heads is gathering their forces even as we speak, coming together with a shared mission of world domination – er, no, wait, we mean souped-up startup support. This week, we announce that some of tech’s most powerful brains are banding together as mentors and venture advisors for 500 Startups. Emerging triumphant from the darkness of their butlered bat caves, cryptically white-boarded cubicles and secret Sand Hill Road sanctuaries, this new, energy drink-fueled League of Leaders will be sharing what they’ve learned about fighting for truth, justice, and the entrepreneurial way.

Here’s the breaking news about these two teams of high-test techies….

The Masked Mentors:

Our mentors are a super-human group of pros, and we’re thrilled to have them in our midst when they’re not busy saving the world from moon-based lasers. They’ll step right from their cell phone booths and into the dazzling 500 Startups Universal World HQ to work closely with our startups by giving 1:1 advice, delivering talks, holding office hours, and generally lending our startups a helping hand as they learn to leap vast data centers with a single bound. A few of our mentors will even be regularly working from our space (you’ll easily recognize them by their capes and tights).

Our super-mentors are diabolically diverse, representing a wide range of skills, experience, and superpowers – startup founders, evil geniuses, platform company leads, human fireballs, UX designers, code warriors, marketing ninjas, mind readers, mad scientists, business development experts, caped crusaders, and more. Beyond world domination, they share a passion for sunsets, long walks on the beach, and helping startups succeed, thrive and scale to daring new heights.

While many of our 60 mentors are based here in the SF Bay Area, others hail from all over North America and around the globe, including lairs in Seattle, Chicago, Los Angeles, Boston, New York, Austin, Vancouver, London, Paris, Beijing, and Tokyo. We can’t tell you EXACTLY where they live or we’d have to kill you, but we’ll be adding even more super-mentors over the next few months, so stay tuned to the same bat time, same bat channel.

But wait, there’s more! In the coming weeks, our mentors will make special appearances on this blog and regale you with tales from their many adventures. But be warned: If you stare too long at the screen, you could be hypnotized into service as an embarrassingly named sidekick….. Bazinga!

Meet the Mentors…. we have received special permission to reveal their true identities

 

    • Aaron Lee (Red Beacon)

 

    • Adam Nash (LinkedIn)

 

    • Amit Kumar (Vurve)

 

    • Andre Charland (nitobi)

 

    • Ben Lewis (Tapjoy)

 

    • Benjamin Joffe (Plus Eight Star)

 

    • Bhanu Sharma

 

    • Bill Hudak (Ztail)

 

    • Blake Commagere (Commagere Ventures)

 

    • Bradley Heilbrun (YouTube)

 

    • Brenden Mulligan (ArtistData / Sonicbids)

 

    • Bret Terrill (Leveraged)

 

    • Brian Witlin (ShopWell)

 

    • Cathy Edwards (Chomp)

 

    • Charles Hudson (CH3 Media Holdings LLC)

 

    • Chris Messina (Google)

 

    • Christina A. Brodbeck (TheIceBreak)

 

    • Colette Ballou (Ballou PR)

 

    • Craig Mod (craigmod.com)

 

    • Cyril Ebersweiler (SOSventures)

 

    • Dan Greenberg (Sharethrough)

 

    • Dan Martell (Flowtown)

 

    • Danielle Morrill (Twilio)

 

    • Dave Schappell (TeachStreet)

 

    • David Marcus (Zong)

 

    • Edward Baker (Friend.ly)

 

    • Eric Ries (Lean Startup)

 

    • Fred Oliveira (Webreakstuff)

 

    • Hiten Shah (KISSmetrics)

 

    • Hunter Walk (YouTube)

 

    • James Levine (Simply Hired, Inc.)

 

    • Jason Putorti (Votizen)

 

    • Jeff Lawson (Twilio)

 

    • Jeffrey Kalmikoff (SimpleGeo)

 

    • Jeremy Toeman (Stage Two)

 

    • Joe Hyrkin (Trinity Ventures)

 

    • John Zeratsky (YouTube)

 

    • Joseph Smarr (Google)

 

    • Josh Baer (Other Inbox)

 

    • Josh Elman (Twitter)

 

    • Karl Jacob (Coveroo)

 

    • Katherine Barr (Mohr Davidow Ventures)

 

    • Kenneth Lin (Credit Karma)

 

    • Lane Becker

 

    • Leonard Speiser (Society)

 

    • Lukas Biewald (Crowdflower)

 

    • Maneesh Arora (RateBrain)

 

    • Mark Fletcher (Winged Pig Ventures)

 

    • Mark Schulze (Quantcast)

 

    • Matt Monahan (The Epic Media Group)

 

    • Michal Kopec

 

    • Patrick Vlaskovits

 

    • Paul Singh (Results Junkies)

 

    • Rashmi Sinha (SlideShare Inc)

 

    • Rebecca Lynn (Morgenthaler Ventures)

 

    • Rob Garcia (Lending Club)

 

    • Robert Fan (Sharethrough)

 

    • Roberto Lino (Cisco Systems, Inc)

 

    • Roy Rodenstein (Going.com/AOL)

 

    • Ryan Freitas (about.me)

 

    • Ryan Junee

 

    • Sachin Rekhi (Blackflipper)

 

    • Shaherose Charania (Women 2.0)

 

    • Stew Langille (Mint.com)

 

    • Ted Rheingold (Dogster, Inc.)

 

    • Victoria Ransom (Wildfire Interactive)

 

    • Zach Allia (Free Gifts)

The Vigilant Venture Advisors:

Our venture advisors make up an elite strike force who will be advising the 500 Startups team. Many of them are also mentors and founders/CEOs of 500 Startups companies (and they’re more good than evil, but we’re not keeping exact score). They’ve been tremendously valuable and responsive to us so far — one flash of our secret signal (a glowing dollar sign) in the night sky and they’re at our doorstep, ready for action.

We look forward to working with them in this new capacity, and hope they won’t crush us with their bare hands.

Meet the Venture Advisors…

 

    • Benjamin Joffe (Plus Eight Star)

 

    • Bill Hudak (Ztail)

 

    • Brady Forrest (O’Reilly Radar)

 

    • Charles Hudson (CH3 Media Holdings LLC)

 

    • Dave Schappell (TeachStreet)

 

    • Edward Baker (Friend.ly)

 

    • Eric Ries (Lean Startup)

 

    • Hiten Shah (KISSmetrics)

 

    • Jason Putorti (Votizen)

 

    • Leonard Speiser (Society)

 

    • Rashmi Sinha (SlideShare Inc)

 

    • Sean Ellis (Startup Marketing)

 

    • Stew Langille (Mint.com)

 

    • Tim Ferriss (4-Hour Workweek)

Please cheer on our new League of Leaders – our mentors and venture advisors –  as they help us make the planet safe for humanity and really cool startups.

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Acquisitions: Pulling Back the Covers – Part 1

Meet The Riddler, the first 500 Startups super-mentor to make an appearance on this blog. The Riddler, aka Ryan Junee, is a serial entrepreneur and start-up advisor by day. By night, he schemes complex riddles to trick fellow entrepreneurs and unwitting technophiles. He is currently working on an as-yet-unlaunched startup. His previous company, Omnisio, developed innovative ways to edit and enhance online videos and was acquired by Google/YouTube in 2008. In this post, Ryan pulls back the covers on acquisitions and shares his adventures from Omnisio.

To many entrepreneurs, the process of getting acquired seems like a black box. I suspect this is because far fewer acquisitions happen than, say venture financings (about which a lot has been written), so there are a lot less data. Also there are generally very strong confidentiality agreements in place protecting the terms of these deals.

I’d like to write a little about this topic since it’s something I’m often asked about, but bear in mind I too am bound by confidentiality agreements regarding the sale of my company, so I won’t be able to go into the specifics of our deal.

This is a two-part post. In this first post I’ll talk about deciding whether to sell your company and some of the key things you and your team need to think about. In the next post, I’ll talk more about the actual negotiation process.

Context

To set the context, I’ll say up-front that my advice is aimed at technology companies (particularly web and software companies) who are selling quite early in their lifecycle. The reality is that acquisitions of this type are usually talent acquisitions. We’ve seen a huge amount of acquisition activity this year, with large companies picking up small teams working on cool new products. This is in large part due to the fact it’s very difficult to hire good engineers right now. Big companies and small startups alike are feeling the pain. One avenue available to big companies with deep pockets is to acquire early stage startups in order to hire their engineers and product folks, effectively paying them a very nice signing bonus.

Take a look at this graphic depicting Google’s acquisitions, and notice how the small acquisitions far outnumber the large ones. Keep in mind that acquisition prices are almost never disclosed so these are just rumored prices, but likely in the right ballpark. This graphic chalks up most of the smaller acquisitions as ‘technology’ acquisitions, but I’m willing to bet most were actually done to acquire talent (I don’t have any inside information on this fact).

What exactly is a talent acquisition? Usually it involves valuing the company based on the number of engineers and product folks that will join the acquiring company. Something like $1-$2M per engineer would not be unheard of. The money is generally paid in installments, with some paid upfront and some paid out over a period of 2-4 years. From the acquiring company’s perspective these are basically signing and retention bonuses, although the deal may be structured formally as an acquisition (stock purchase). If the company has outside investors, they will probably get paid their share upfront with no payments held back, since they aren’t joining the acquiring company.

So that sets the context for the rest of this post. If you are running a rapidly growing business and/or one generating a healthy cash flow, then you are in a different ballpark and other posts will probably be more relevant to you.

Should You Sell?

A lot has been written lately about the good and bad of selling out early vs swinging for the fences and trying to create the next billion dollar business. I don’t want to rehash the philosophical and macro-economic arguments, but instead focus on the personal decision of the entrepreneur. This is a very important personal question that every entrepreneur who finds themselves in this position must answer.

Despite the current thread of “dipshit companies selling out early” reverberating in the blogosphere, I don’t think any entrepreneur should ever feel bad about selling his or her company. If you look at the range of possible outcomes for a startup, selling early is still on the high-end. Sure you could do even better and have a YouTube sized exit, but those are very rare. Selling, even for a small amount, still puts you FAR above the majority of startups whose likely outcome is failure. Remember that you are the entrepreneur andthis is your company. You took the risk to start it, you worked hard, and now you are rewarded with the option to sell should you wish to. This is your decision to make, you earned it. Theodore Roosevelt summed up this sentiment brilliantly in 1910:

“It is not the critic who counts; not the man who points out how the strong man stumbles, or where the doer of deeds could have done them better. The credit belongs to the man who is actually in the arena, whose face is marred by dust and sweat and blood; who strives valiantly; who errs, who comes short again and again, because there is no effort without error and shortcoming; but who does actually strive to do the deeds; who knows great enthusiasms, the great devotions; who spends himself in a worthy cause; who at the best knows in the end the triumph of high achievement, and who at the worst, if he fails, at least fails while daring greatly, so that his place shall never be with those cold and timid souls who neither know victory nor defeat.”

So with that out of the way, should you sell? First look at your motivations as an entrepreneur. You may be in this for the money, or to change the world, or more likely some combination of both.

If your primary goal is to change the world, you need to decide if you can best achieve your goal by continuing with your current company or taking an exit and then starting something new in a few years. Some inputs to this decision will be how passionate you are about the work you are currently doing, and how good the offer is. The best laid schemes of mice and men often go awry, and it’s certainly possible that a year or two into your business you aren’t achieving the success you imagined at the start. You have to really try and evaluate whether continuing what you are doing now is your best shot vs starting from scratch again. At least you have some sense of the odds with what you are working on now; starting afresh is a shot in the dark.

If money is your primary goal, it’s important to realize that we don’t have constant utility of money. Going from a net worth of zero to $1M, $5M or $10M feels a lot different than going from $10M to even $50M or $100M. There are several life changing thresholds you can cross, for example getting out of debt, owning your own house outright, never having to worry about work again. These things can significantly change your life, and beyond that the differences are more like do you own your own private jet or your own island chain. Going from ‘starving entrepreneur’ constantly worrying about making rent and skimping on food, to being comfortable and free to do whatever you want – that’s a big deal. Taking an early exit can put you in this position, and give you the time and flexibility to start whatever company you want next time around. In fairness, if you stick with your current company you may also have an option to take some cash off the table when you raise a VC round. This practice is becoming more and more popular.

I’ll end this section by saying it’s definitely not an easy decision to make. It wasn’t for us. We ended up weighing a bunch of factors like those above, as well as the prospects for our company going forward given we were pre-revenue and the funding environment was looking quite shaky (we were one of the last companies Google acquired before the economy collapsed, and so in hindsight our timing impeccable). We also worried about potentially competing with Google/YouTube because we knew they were developing similar products internally.

As you can see there’s no simple answer to the ‘should you sell’ question. It’s very complex and nuanced. The important thing to remember is that it’s your decision to make as an entrepreneur. Don’t listen to the people on the sidelines who really have no idea what you are going through.

Closing Doors

This seems like an appropriate point to mention that there are certain actions you can take as an entrepreneur that will prevent you from even getting the opportunity to make this decision. Specifically, if you decide to take VC funding, or perhaps even angel funding, you may close the door to an early stage exit.

In a talent acquisition, the acquiring company is paying for you to join them. If they have to pay large amounts to outsiders who aren’t going to join the company, that means they either have to pay more for the deal overall, or pay the founders less making them less incentivized to take the deal and/or stay at the company. VCs almost always have the power to veto a sale of your company, and will likely do so for an early exit because the nature of their portfolio investing approach means they need companies to swing for the fences.

In our case we hadn’t taken much external investment and the founders owned most of the company, which meant that we at least had the option to sell if we wanted to. When raising money it’s always good to think about what implications it will have on your exit opportunities.

How to Sell Your Company

If you’ve decided you want to sell your company and you don’t yet have an offer on the table, you are surely wondering how to go about getting one. Unfortunately, the answer is don’t try.

As the saying goes, “companies are bought and not sold“. This means it is best to focus on building and managing your company as an independent and successful business, rather than trying to convince other companies to buy you. In this way it’s kinda like dating. The more valuable you are as a company, the more interest others will have in you. Also keep in mind that you can’t control the circumstances of other companies, such as whether they are acquiring or not and what type of deals they are looking for. What you can control is your own company, so focus on that.

Of course, it’s not just that simple. Companies have to somehow find out about you if they are going to approach and make an offer. Big companies are often looking for diamonds in the rough, but there’s a lot of rough out there so you have to somehow get their attention. This is where the value of a startup hub like Silicon Valley is quite evident. A large number of deals happen based on who you know. The initial introduction of your company to a potential acquirer is likely to be by a mutual acquaintance, which is why networking is so important as I mentioned in my previous post. Of course you can’t really plan for this, but you can make it easier for serendipity to strike by simply getting to know a lot of people while you build a great company.

These days there are certain places acquisitive companies can look that have a higher concentration of diamonds, such as programs like Y Combinator. Being part of a program like this is good way to get the attention of acquiring companies. While the folks at Y Combinator don’t encourage founders to sell early, they do encourage the founders to make their own decision and so you do see a number of Y Combinator companies getting picked up quite early.

What would be considered a diamond? Acquiring companies are generally looking for a cool product/technology that is somewhat synergistic with their business. However, this is more of a proxy to prove that the team is smart and capable of executing, and shares a similar vision. It is quite possible that the acquiring company will not want to continue offering your product once you join.

Pick a Number

So you’ve got tentative interest from an acquirer, what should be your first step? You should absolutely sit down as a team and come up with ‘the number’. This is the absolute minimum price you will accept for your company. How much it’s going to take to give up on your dream? Once your company is acquired, you will no longer be in control and the acquiring company can do anything they like with the product – which includes shutting it down. Come up with your number under the assumption that this will happen. Your baby is gone. How much is it gonna take? And really think about what your minimum is – if you would take even $1 less that is not your minimum. It’s important to have a very open discussion with your cofounders, and have this number set in stone. Later during the heat of negotiations you will face serious temptations, but if you’ve thought about this minimum number in advance in a calm and rational way you confident in walking away from the deal if the acquirer does not meet your price. I mean this – you have to be prepared to say “thanks for your time” and walk away, which I can tell you is damn hard to do. But it’s never a good idea to start lowering this number during the negotiation process when you might not be thinking clearly. Don’t succumb to temptation and do something you may regret later.

Of course ‘the number’ is not just a single number. There are terms attached, such as whether the payment is in cash or stock (and how you value the stock of the acquiring company), how much is paid upfront and how much is held back, the period over which it is paid, your new role, salary and terms of your employment etc. It’s also perfectly rational to have a different ‘number’ for each acquirer, in the case that you have multiple offers. Naturally you will be more excited about working at some places than others.

Be sure to hash all of this out with your team before you embark on the actual negotiations.

In a separate upcoming post, I’ll talk about what to expect in the negotiation process, the importance of lawyers and advisors, and some of the key terms you should worry about. (UPDATE: Part 2 is now published)

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Announcing the CrowdFlower Fund

We recently announced the Twilio Fund, a new investment vehicle for startups building on top of the Twilio cloud communications platform. Today we’re thrilled to welcome another addition to the 500 Startups platform micro-fund family – the CrowdFlower Fund! The CrowdFlower Fund is a $250,000 platform micro-fund that will invest in startups integrating with CrowdFlower’s cloud labor platform.

Why CrowdFlower?
CrowdFlower helps companies with many types of tasks that humans do better and faster than machine algorithms by sourcing people for their processing power. A person can quickly tell you if a photo contains a person or just a landscape, if a product is categorized correctly, or if your business listings are accurate. Say you want to make a new dictionary — like CrowdFlower user Wordnik — that accounts for the way a word “feels,” in order to provide the appropriate connotation. A computer program can’t decipher the feelings behind most words, but a human can. Other startups that have integrated CrowdFlower’s real-time human input include:

 

 

    • Skout (content moderation)

 

    • Bizo (tagging and organizational categorization of businesses)

 
Like Twilio, we see CrowdFlower as an emerging platform that can help fuel innovative, creative startups using its tools and APIs. We also believe in the power of crowd sourcing technology and are excited to help kickstart the CrowdFlower ecosystem.

Details on the CrowdFlower Fund:
Starting today, we’re accepting submissions for the CrowdFlower Fund. The structure is similar to the Twilio Fund:

 

    • The CrowdFlower Fund is a $250,000 fund run by 500 Startups.

 

    • We’ll offer investments of $10,000 in up to 10 companies for a one percent stake. In addition, one or more of these companies may be selected for a $50,000 investment and invitation to participate in the soon-to-be announced accelerator program at the 500 Startups space in Mountain View, Calif.

 

 

    • We’ll be reviewing submissions on a rolling basis and will reach out to you if we’re interested in your product.

 
Bring it on!

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