Post Category → Accelerators

Your Best Advisors: Experienced Founders

TL;DR Nutshell: While great advice for a founder team can come from all kinds of sources, nothing comes close to matching the value of advice from other founders (preferably local ones) who have been through the exact same fire themselves, and made it to the other side.

Related Reading:

Suddenly, everyone who just shows up to school gets a participation trophy, every lawyer with small clients is a ‘startup lawyer,’ and everyone who can pull a few strings is a startup ‘advisor’ or ‘mentor.’ While there are truly great advisors/mentors out there, I see founders constantly wasting time, equity, and in some cases money on people who have very little substantive value to deliver to an early-stage technology company.

While the above-linked post gets more in-depth into the source of the problem, this one is about one specific type of ‘advisor’ that every single founder team should have: other experienced founders; specifically founders who have gone through a successful fundraising process, dealt with the nuances of founder-investor relations (preferably with the same/similar types of investors), and either achieved an exit, failed (you can get great advice from people who failed), or are still going strong.

Cut Through the PR

Given how easy it is to orchestrate personal branding and online PR that obscures the truth, every founder team needs people to talk to, privately and confidentially, to get direct, relevant, unvarnished advice; the kind that doesn’t make it onto twitter or blog posts. And there’s no better place to find that advice than experienced founders. 

Want to know what it’s actually like to work with a lawyer? You don’t ask other lawyers, or google, or other people in the market who know her; you ask her clients. Want to know what it’s actually like to work with a specific VC? You don’t ask twitter, or angel investors, or people who run accelerators. You ask their portfolio companies. And more specifically, within those companies you don’t ask the CEO put in place at the first large round and who managed to negotiate the ‘founder’ title for himself; you ask the original founder team that took the first check.

I can’t tell you how often founders will ask the wrong people about a lawyer, a VC, an accelerator, or some other service provider, and then get a complete 180 degree, unvarnished perspective when they ask, off the record, the direct ‘users’ of those people. That’s how you find out that the X lawyer who is ‘extremely well respected and well-known’ happens to take a week to respond to founder e-mails; or that Y ‘well-connected’ VC uses shady tactics to coerce founders into accepting unfair terms. You won’t get it from twitter. And you won’t get it from people who didn’t sit directly in the founder chair. 

There is a world of difference between talking to people who know about the challenges of being a founder v. those who lived them.

Finding Experienced Founders

Don’t expect seasoned founders to be running around town doing free office hours for random founder teams with an idea and hope. They’re not mother teresa. They’re sought-after, extremely busy people, and expect to have their time respected just like anyone else. So hustle to connect with them just like how you hustle to connect with other important people. Meetups, LinkedIn, Twitter, Accelerator Alumni Networks, etc. While I have serious reservations about lawyers connecting clients directly to investors, I think great VC lawyers are excellent connectors to experienced founder teams, as long as the ‘intro request’ makes sense.

But you can know that most excellent founder CEOs I know, even the ‘tougher’ ones, have a special, soft place in their heart for other founder CEOs fighting the same fight. Despite the fact that their advice is probably some of the most valuable you’ll ever find, they’re often the last people to ask for ‘advisor equity’ in exchange for their advice. Although that doesn’t mean you shouldn’t voluntarily offer it to them.

In short, very very few founder teams can make it very far purely on their own judgment. They need independent advisors to consult with on relevant issues. But most advisors don’t have first-hand knowledge of the core challenges of being a founder, and therefore aren’t qualified to advise on those issues. That knowledge lies with experienced founders. Find them.

Navigating Referrals in a Connected Startup Ecosystem

Nutshell: Referrals and recommendations from influential people in your startup ecosystem, or from people you trust, are an extremely important way to build your startup’s set of advisors, mentors, service providers, investors, etc.  But there’s a wide gap between an authentic referral made on merit v. one made because of quid-pro-quo business relationship hiding in the background.

Background Reading:

Cheap “Networking” v. Respect

I have never set foot on a golf course, and really don’t care to any time soon. I honestly don’t know anything about wine other than that I’d generally prefer a good beer over it. I have no idea what anyone on ESPN is talking about every time I’m sitting in my barber’s chair. And I still need someone to explain to me why everyone on there is so dressed up, to talk about sports? Why, might you ask, would any ambitious lawyer who cares about biz dev make zero effort at improving his game on what many consider to be the core pillars of business networking?

In short: when I recommend anyone to a client: an advisor, a service provider, an investor, even a specialist lawyer, I believe it should be solely because that person actually deserves the referral – meaning that I think they are the best for the task – and not because I expect to gain something personally from making that recommendation, or because I “like” them. I don’t care about anyone’s golf game, sports knowledge, or whether they will refer anyone back to me – and I expect the same in return.

I have pissed off and/or disappointed a lot of people because of this mindset, but in the arc of your own career, particularly in a career based on serving as a trusted advisor, respect will sustain you far more than dozens of superficial connections purchased with steak dinners and side deals.

Build Your Inner Circle

As a founder, the moment you show even the slightest sign of building a strong company, you’ll find yourself inundated with people who want to connect with you. One of your first jobs is to learn, quickly, whom to (politely) say “no” to. You can only have so many coffee meetings before they get in the way of actually building a real company. And if you spend enough time at a few startup events you’ll quickly realize how many “startup people” aren’t actually building real companies. Avoid noise. Find signal.

Building your network (quality over quantity) is extremely important, especially if you’re CEO. But it’s (at least) equally important to build and maintain your inner circle.  More than people with great resources, money, or advice, these are smart, helpful people whose character you’ve judged to be a cut above everyone else’s; meaning that they can be trusted in a way that your broader group of connections cannot.  There is no magical formula for finding these people, or sorting them out from others. Your ability to “read” people will improve over time.

In general, your inner circle should be made up of experienced, smart people who (i) consistently speak their mind more freely than others, (ii) often make recommendations that run against their financial interests or personal connections, and (iii) will give you opinions/feedback that others in the ecosystem don’t have the personal brand independence to give.  Referrals from those people are gold.

Your inner circle can be made up of advisors, investors, experienced founders at other companies, etc. What matters most is that you have one to turn to when faced with those inevitable, high-stakes moments where people with all kinds of incentives are pushing you in different directions, and you need cold objectivity. And as I’ve mentioned before and will repeat here: build diversity of perspectives into your inner and outer circle. The smaller the ecosystem, the harder this is to do – and often times connecting with true outsiders (geographically) can be very valuable.

Lawyer Referrals: Merit v. Kickbacks

With respect to the legal services required for a scaling tech company, a group of corporate lawyers (what we are) generally serve as the quarterbacks of a broader team of specialist lawyers; much like how an internist or general practitioner physician quarterbacks specialist doctors in treating a complex condition. For that reason, the main types of referrals that we (at MEMN) find ourselves making are to specialist lawyers – patents, trademarks, immigration, IP licensing, privacy, import/export, etc.

As I’ve written before, every law firm has built in financial incentives to “cross sell” their own lawyers. If I’m at a law firm that follows the traditional “one stop shop” full service approach, I make money if I can convince you to use our specialist lawyers. It’s called “origination credit.” If you use another firm’s lawyers, perhaps because they have more domain expertise for my type of technology (often the case for patent lawyers in particular), I get nothing. Given this fact, it should not shock you at all when your BigLaw corporate lawyer always refers work to his in-house specialists, without suggesting more appropriate alternatives.

A network of specialized, focused boutiques and solo lawyers should, at a structural level, have a far more merit-based referral system. And it does.  But even among smaller firms there are lawyers who’ve set up kickback relationships that usually aren’t disclosed to clients – and yes these are often on shaky legal ethics grounds. They’re often structured in the form of a referral fee, or % of fees resulting from the referral. While I’m not going to say definitively that these arrangements should automatically invalidate the trustworthiness of a referral, they should at a minimum give founders reason to do their own diligence on the referral before moving forward with it.

It never hurts to ask a referring lawyer: “is there a referral fee arrangement in place here?” If it’s some kind of startup program (accelerator, incubator, etc.) making the referral, I would ask “is the lawyer/firm you’re referring me to sponsoring your program?” ‘Sponsorships’ often mean the firm is, effectively, paying for referrals. This is actually becoming a mechanism by which large firms entrench themselves, through accelerators.

Again, I’m not going to criticize lawyers who monetize their legal connections. I understand the reason behind it.  But with that being said, MEMN’s specialist network does not have any built in kickback arrangements. When I tell a client “you should use X lawyer because she’s the right person, and at the right billing rate, for the task” I value being able to say it with total objectivity. Back to the point made earlier in the post, make your money by becoming awesome at what you do, not by trying to cut shady side deals that taint your trustworthiness.

Financially motivated referrals work great in a lot of product and service vendor-oriented marketplaces, but in the world of top-tier advisors – where trust is your most valuable asset – they should, in my opinion, be avoided. One of the largest benefits of properly functioning ecosystems is how transparent they are compared to large, top-down organizations.  That transparency means meritocracy, if enough people with backbones are able to resist the urge to “cut a deal.”

Startup Accelerator Anti-Dilution Provisions; The Fine Print

TL;DR Nutshell: All major startup accelerators have uniquely strong anti-dilution protection in their stock purchase agreements.  These provisions are serious, can have a material impact on cap tables, and founders should be aware of what they mean. Many of them are also structured in ways that really don’t make sense economically, and are unfair to founders. Some better approaches are out there and worth considering.

It used to be common knowledge in startup circles: no one, not the CEO, not your first big investor, not even your grandma got full anti-dilution protection.  Maybe they got that watered-down weighted average stuff that is common in VC rounds, but the idea of guaranteeing someone X% of the cap table was a non-starter… until accelerators showed up. On top of receiving their % of the cap table (anywhere from 2-8%, depending on the accelerator), the vast majority have provisions requiring you to “top up” their shares if they experience any kind of dilution pushing their ownership below the % they originally purchased.

Granted, the protection typically expires at a seed equity or Series A round (called a ‘qualified financing’ in the docs).  Full anti-dilution forever would be non-sense.  But these provisions are still a big deal and can materially impact the capitalization distribution of the Company, and even impact how a company might go about structuring seed rounds.  While we definitely haven’t seen every accelerator’s anti-dilution provisions, we’ve seen enough, certainly most of the top accelerators’, to say that most fall into the following categories:

A. Protection from only additional Founder issuances – The most company/founder favorable anti-dilution protection, but unfortunately not the most common; though at least one very elite accelerator uses it.  In short, the accelerator is protected only if the founders issue themselves new equity, or otherwise somehow increase their ownership %s, after issuing the accelerator shares.  If stock, warrants, notes, etc. are issued to outsiders, like for services or for investment, no “top up” is required.

B. Full protection until a qualified equity round – This is the least company/founder favorable, and is unfortunately the most common; including among some top brand accelerators.  Basically, no matter the reason for issuing additional securities – services, investment, etc. – you must top-up the accelerator completely until the company raises $X in an equity round.  That last point is extremely important, and I will discuss it further below, given the fact that convertible notes/SAFEs (and not stock) have become by far the predominant form of raising seed rounds.

C. Full protection until a qualified equity or debt/SAFE round – This is a middle-ground provision that is less common than “B” above, yet at least is more agnostic as to its impact on seed round structures. If, after issuing the accelerator shares, you raise a round of $X of equity or convertible notes/SAFEs, the anti-dilution protection stops.

The “C” anti-dilution category is a little tricky, because even if the “tolling” of the anti-dilution stops at raising, for example, $250K in convertible notes (assuming that’s the qualified financing threshold), you still have to provide a top-up when those $250K in notes eventually convert.  While that’s still free shares to the accelerator, it ends up being far fewer top-up shares than there would be under the “B” (more common) type of anti-dilution protection.

Example: 

  • StartCo issues Accelerator 6% of stock as part of the program.
  • After the program, the Company (in sequence) (i) issues stock to several employees, (ii) raises $2MM in convertible notes @ various caps, (iii) issues some more options, and then (iv) eventually closes a $4MM Series A round.
  • The “qualified financing” threshold in the accelerator’s stock agreement (for purposes of ending anti-dilution protection) is $250K.

If StartCo had attended an accelerator with “A” type anti-dilution, they wouldn’t have had to top-up the accelerator at all – no free shares. As long as no equity was issued to the original founders, the accelerator continued to be diluted by future issuances just like the founders themselves were.

If StartCo had attended an accelerator with “C” type anti-dilution, they would’ve had to “top up” (or “true up,” however you want to call it) the accelerator for (i) the stock issued before the note round(s), and (ii) only for the first $250K in notes of the seed round. Once the $250K in notes was issued, anti-dilution stopped, though some top-up shares would need to be issued in the Series A round once it’s known exactly how many shares those $250K in notes convert into. While this scenario is worse for the company/founders than scenario “A,” it’s not nearly as bad as “B.”

If StartCo had attended a “B” category accelerator, which remember is the most common, including among some top accelerators, every single issuance before the Series A, including often (i) option pool shares reserved in connection with the Series A and placed in the “pre-money” and (ii) (in the worst variants of this category) all $2MM in notes, would require anti-dilution top-ups. That’s A LOT of free shares to the accelerator.

Accelerator A asked for 6% only on Day 1. Accelerator C asked for 6% on Day 1 and for maybe 3-6 months. Accelerator B asked for 6% for possibly 1-2 years. 6% is not just 6%. The details matter. A lot.

And perhaps more interestingly, “B” type anti-dilution is relevant to how founders structure their seed (pre-A) rounds.  If StartCo had raised $250K in seed equity, it could’ve cut off the accelerator’s anti-dilution immediately. But by raising seed money as notes and putting off equity for a Series A round (which is extremely common), it let the accelerator’s anti-dilution drag-on. Does it really make sense for accelerator anti-dilution to favor one type of seed round structure over another?

Which accelerator’s anti-dilution makes more sense?

As someone on the company side and at a firm that (deliberately) doesn’t represent accelerators, I’m obviously partial to the “A” approach of accelerator anti-dilution.  But stepping back and trying to assess things objectively, it also just makes more sense.  What exactly should an accelerator’s anti-dilution protection be “protecting” for? If the concern is that a set of founders with low ethics will immediately dilute the accelerator post-program by issuing themselves more equity, then “A” anti-dilution protects for that.

Perhaps, for economic reasons and much like the qualified financing threshold in a convertible note/SAFE, the accelerator doesn’t want its ownership % to be cemented until a serious financing round has occurred that prices the company’s equity. If (and I do mean if) that is the intent, it’s not clear why it should matter whether the seed round is debt/SAFEs or equity, as long as it’s large enough to be considered a real seed round. Plenty of VCs/seed funds who are more than capable of pricing companies (via caps) are signing notes/SAFEs.  The logic for “B” and “C” type anti-dilution must be, fundamentally, about grabbing a larger share of the cap table; not “protection.” 

If accelerators insist on “protection” for more than just self-interested equity issuances, then they should at least modify their anti-dilution provisions to stop favoring equity seed rounds over debt/SAFE rounds, given how much more prevalent the latter have become. And founders should be aware that if a particular accelerator is asking for 6% w/ “B” anti-dilution, that could be equivalent to 10%+ on Day 1 (much more than simply 6%), after accounting for all the free shares that must be given to fulfill long-term anti-dilution obligations. 

Kudos to the few accelerators who’ve moved toward the most company/founder favorable (and justifiable) type of anti-dilution; the “A” category above.  As for those preferring the “B” and “C” categories, which includes some very well-known brands, it would be great to hear some thoughts on why you think they are a more reasonable structure.  If I were a founder in one of those accelerators, I’d be interested in hearing those thoughts as well.