Entrepreneurial Leadership and Management . . . and Other Stuff


No Pro Rata Investment Rights?

I passed on an investment this week because the terms of the deal didn’t include the right for investors in the current round to maintain their percentage ownership in the company, through additional investment, in future rounds. This is usually outlined in the term sheet, in legalese, as “Preemptive Rights,” “Right of First Refusal” or even “Right of First Offer.” Basically, such a right simply allows early investors to keep themselves from being diluted in future investment rounds. There is no free ride in this situation, of course, the investor must pay for their pro rata share at the next round’s price, just like everyone else. What was particularly troubling about the term sheet in question was that it was pretty clear that the lead investor excluded such rights from the terms in order to have the ability to flush out smaller, early investors in subsequent rounds of financing.

I’ve seen this before (although less frequently over time) and it boggles my mind. Yeah, if you have a boatload of little investments the cap table can be a bit complicated, but that’s just math. Generally speaking, smaller investors don’t have any strong voting rights, board seats or other forms of control so punting on them doesn’t improve the speed or operations of the company. It’s treating form well ahead of function.

So why explicitly exclude or inhibit any investor small or large from investing in your next round? Are you afraid that you might scare off a large, future investor who doesn’t want smaller investors involved financially? Think about it. Are there rational people who would take this position? If so, are these people you want to deal with? To me, the fact that existing investors want to invest more money to retain their ownership is a hugely positive signal indicating that the people who know a lot about the company have faith in its progress and opportunities for success. As an entrepreneur, don’t you want to encourage such behavior?

By not explicitly giving investors pro rata rights (keep in mind that this provision simply grants the investor the right, it’s not a requirement – I’ll write a post on “Pay-to-Play” term sheet weirdness soon), you not only create a problem in subsequent rounds of funding, but you also create a problem now, in the current round. If, as a potential investor, I fear that I may not be able to prevent my dilution in future rounds, how anxious a I going to be to get involved. I’m not. Thus, my exit from the deal this week.

As my long-time friend and corporate general counsel, Peter Johnson, always says, “it’s, at worst, giving them the sleeves of your vest.” “Them,” in this case, being the investors you want to have involved in the company now and, hopefully, in the future.

BTW, there are loads of resources on the web discussing term sheets from many points of view. I highly recommend you take a look at Brad Feld’s and Jason Mendelson’s term sheet series as a starting point.

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 October 29th, 2010  
 Investing, Startups, VC  

Fixing Broken MP3 Files

About six months ago, I updated to a new version of iTunes and found that only about 20% of my MP3s could be added to my library. That’s not 20% of the new ones, but 20% of the songs that were already loaded in the previous version of iTunes (I’m omitting the long story of why I cleared my library and reloaded it). So, out of my 3,000 or so songs, iTunes only recognized about 600 of them. The first thing that went through my head was that Steve Jobs had personally blacklisted almost all the tunes I like. Come on . . . that’s now more rational than your first knee-jerk reaction to it, right? After dismissing the idea that Mr. Jobs might be carrying out a personal vendetta against me, I really panicked when I thought my music had somehow actually become corrupted. But no, the music was recognized by the myriad of other music players on my computer without any problems – I could even play them without issue from Windows Explorer.

My next thought was, do I even care? After all, the other music players were playing my music just fine. The trouble is that if you want to get music on any of the latest generation iPods/iPhones, you need iTunes. Eventually, the other players will catch up, but Apple seems determined to stay ahead of them, making iTunes the only method for transferring music and building playlists on cool, little Apple music players. Nothing like openness . . .

Figuring out what was actually wrong was a challenge. Internet searches yielded almost nothing. While I suspected that iTunes itself was the root cause of the problem – screwing up the files at some point in the past – I couldn’t verify that. So, I had to hack at searches until I stumbled upon MP3val, a free tool (Windows only) that checks the integrity of any MP3 file. Once run, I found out that the headers of most of my MP3 files were corrupted. Recent versions of iTunes, apparently are a real bitch about having proper MP3 headers, so rather than telling me what was wrong, they just chose not to import the files with “problems.” I used MP3val to “fix” a few files and iTunes imported them without any issues. Finally, a solution.

But not so fast . . . while fixing the headers, MP3val lost most (almost always all) of the tag information in the header – title, artist, album art, album title, song title, etc. So, to really fix the files, I had to run them through MP3val and then re-insert all the tag information again. A serious pain in the ass. I experimented with several methods and came up with this one. If you have such a problem. I hope this helps.

  1. Make a copy of the directory tree where your music is – everything. You never know when you’ll mess something up even more and have to restore from your copy. Don’t worry about the disk space, assuming you have what you initially need, you’ll delete this backup when you’re done.
  2. Now, iterate through manageable segments of your music library (a hundred files or so at a time if you can – I keep my music in subdirectories broken up by genre and/or date so I just dealt with one directory at a time) – and perform each of these steps on the group of files:
    • Use your favorite tagging program (iTunes, obviously won’t work) to create new filenames for the songs that contain all the tag information from each MP3 file (they’ll look something like this: “Doobie Brothers – Long Train Runnin’ – Best of the Doobies – 02 – Rock – 1976.mp3.” If your problem is similar to mine, you’ll be able to get everything except album art into the tag. I used MP3tag’s “convert” function to do this. The idea is to retain as much tag information as possible prior to running MP3val to fix the header.
    • Then, use MP3val to “scan” then “repair” the files with problems. You’ll likely, but not always, lose all existing tag info.
    • Go back to your tagging program and reverse the process in number 1, above. Convert the file name back to tag information.
    • If you have missing or incorrect tag information, now would be a good time to fix it. This includes importing album art. Most tagging programs can look up the album art for you automatically assuming you have the correct album name.
  3. Once you’re sure everything worked out, delete the backup.

There you go, just three steps. OK, one of them is complicated and if you have to go through 2,400 files, time consuming too. When I was done, iTunes read ‘em all. I also got the anal-retentive monkey off my back by making sure all my music had it’s correct information and album art. While I still hate iTunes, I recognize its necessary evilness and am coping with it thanks to MP3val and a boatload of time to fix everything.

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 October 28th, 2010  
 How To, Software  
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Who Should I Hire?

I’ll take a great team over a great idea in business any day of the week (of course, having both is even better). Why is that? Because ideas are often fleeting – markets change, technology evolves, competition is a moving target and customers are, sometimes, fickle. Great teams can adapt and continually innovate. Great ideas without great teams behind them stagnate.

This is even a bigger problem for startups than it is for established companies. In startups, ideas tend to be in more flux than in mature companies because of the limited time and resources startups have to completely understand the customer. While older companies aren’t immune to these challenges, they are generally not subject to the same limitations.

So, how does any organization hire the right people? Well, starting with a great team helps, of course, but understanding what’s important in expanding it is crucial. Here are a few things to ask yourself when trying to identify the next person you’ll add to your team.

  • Is there a cultural fit? Far more important than having the knowledge required for the job is whether the candidate will fit in with the rest of the team and, in fact be a driver and communicator of the culture you want in you company.
  • Is the candidate a risk taker? He/she should be. Why would you want someone who is going to move slowly and cautiously in your organization. The best people are aggressive in their actions and play offense all the time.
  • Does the prospective employee fear change? Hope not. In fact, the candidate should love change and even seek it out. Many people are afraid of change and even fight it in passive ways, slowing the organization down. If you want a hard-driving, fast-moving organization, you need people who love to drive and be involved in change.
  • Can the candidate work as part of a team? Not only are great people more effective as individuals, but when put together as part of a team, they can virtually make miracles happen.
  • Does he/she have the skills you’re hiring for? Duh. You’re probably hiring because you’re either stretched too thin or you need new skills in the organization. It’s good to thoroughly check if the candidate actually has these.

This is far from a complete list. There are going to be criteria specific to your organization and core to your success that you’ll add to it. The key point here is that hiring the right people is as important as it gets when it comes to running a company or managing any group of people. It’s the team you have that will make the difference in the end and having the best team possible should never be sacrificed.

 October 11th, 2010  
 Management, Startups  
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Do More Faster . . . Accelerating Your Startup

If you’re an entrepreneur and you’re not familiar with TechStars, it’s time to get your head out of the sand. TechStars is a mentorship-driven seed stage investment program. Its goal is to help fledgling companies and entrepreneurs get going. The key to this help is guidance, mentoring, a little hand-holding and an opportunity to get financed at the end of each three month session.

I’ve been fortunate to have been a mentor for the last two years and an investor in TechStars Boston. I’ve also made seed investments in three TechStars companies, AccelGolf, Socialsci and Marginize. I truly enjoy the mentoring part of the program, there’s nothing quite as fun engaging with smart people on interesting topics and reflecting on the experiences I’ve had starting companies myself over the years.

To capture the thoughts and ideas of some of the mentors in the program, David Cohen and Brad Feld, the brain trust behind TechStars, have compiled a book of advice to startups called, Do More Faster: TechStars lessons to Accelerate Your Startup.

I was honored when David and Brad asked me if I’d write a chapter for the book on hiring people who are better than you are. It’s a subject near and dear to my heart since I fundamentally believe that successful companies are built around superb teams and not necessarily great ideas alone.

Congratulations to both David and Brad. The book, by the way, is available through Amazon now. You can check out more about it at the Do More Faster site.

 October 6th, 2010  
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Gadget Review: Axis Q1755-E Network Camera


In the last few years I’ve acquired several network cameras from a variety of manufacturers and have never been truly happy with any of them. Earlier this summer, I started a project that required a network camera and I tried to capitalize on the wisdom gained from my previous poor choices with a list of features and functions I wanted.

I only had two features that were actually required. One was that the camera be ready for outdoor use in wide-ranging conditions – temperatures as low as -20°F and as high as 100°F; precipitation – sun, rain, and snow; and other environmental factors like pestilence and locusts (it’s in New England after all). The other requirement was that it had to be powered through the Ethernet cable (PoE). The camera was to be installed over 300 feet from the router/switch (more on this later) and there was no AC power available anywhere near there.

There were, of course, other desired features. These greedily included:

  • I preferred if the cold weather operation functioned without the use of a heater inside the enclosure.
  • Pan and tilt was an option, but a zoom lens was desirable (10X optical zoom was my goal).
  • An autofocus (or really wide aperture) lens – once I installed it, I didn’t want to have to open up the case to focus the lens
  • A wide angle lens – to get as much of the scene in as possible without being a mile from it.
  • HD image quality – 720p/1080i while still having decent frame rates over the network.
  • Support of Motion JPEG was my primary goal, but H.264 would be great for future use.
  • An FTP client so that still photos could be transferred somewhere else.
  • An API or some type of macro function inside the camera so that I could schedule certain actions.
  • Finally, and this really was more of a requirement than an option – no need for specialized, proprietary software to view the feed from the camera. I should be able to view the stream from any web browser and be able to easily include the feed in any web page that I want.

While there are loads of cameras out there, the only one that met my needs at the time – all of them, actually – was the Axis Q1755-E. Well, I should say that there are other cameras that met all these needs, but they were substantially more expensive. That’s not to say that this camera is cheap. It’s not, but it’s much cheaper than other cameras in its class. I’ve had several low-end Axis cameras in the past. While I haven’t always liked their performance, their in-camera software was much better than most other cameras that I have played with.

I’m very happy with the performance of the camera. Live broadcast over the internet has something to be desired, but I imagine that my installation is hampered by cable length issues (see below) and by a crappy network service provider. The picture is sharp and clear and big. HD makes a huge difference. Low light operation is OK. I’ve seen better. The picture tends to get a bit blurry when the sensor doesn’t have enough light. Perhaps the thing I like best about the camera is its handling of background lighting. The camera does an excellent job of managing images with a large range of lights and darks without blowing out the lights or hiding the darks.

Under normal circumstances, installation of the camera would have been a breeze. In my case, the camera was being installed at a construction site with no power near where I needed to mount the camera. The closest power and Ethernet drop was over 300 feet away. I decided to use PoE to power the camera and eliminate the need for bringing an AC line to it. With or without power, the Ethernet spec states that the cable should not be longer than 100 meters. As such, I was pushing things pretty hard. I first measured out 326 feet of gel-filled cable (gel-filled because it handles harsh outdoor conditions better – I also ran it in PVC tubing the whole way). Once connected, nothing worked. My cable tester was showing no life. I cut the cable back to 310 feet and then everything worked. I must have been on the hairy edge.

Camera mounted on 4X4 PTWith the camera showing signs of life, I decided to mount it on a 10 foot 4X4 pressure treated post. I planted it in cement to make extra sure that there would be no movement whatsoever. Unfortunately, I neglected to consider that the post, itself, might twist as green lumber tends to do. The image from the camera slowly moved to the right during the weeks after installation. It took me a while to figure out what was happening. The camera was mounted in the housing well and the housing to the post. I even considered that the sensor might be moving as it heated up. Eventually, it occurred to me. When you look at the post now (click on the image), you can see that the top of the post is at a slightly different angle than the bottom. Next time, I’ll use something synthetic.

I’m happy with the camera, its features and flexibility. It would be great if low-light performance was a bit better, but the HD image and clarity are range topping for the price point, IMO. The ball joint used to mount the camera is also somewhat problematic. It’s a bear to get the camera even with the horizon and pointed exactly where you want it, especially when it’s 10 feet in the air. Because of the ball joint, you can’t make changes in a single axis – the camera just flops around until you tighten the bolt. Lot’s of trial and error required. It’s not a cheap camera, but it’s very flexible and should last a long time. I recommend it if you have similar requirements.

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 September 8th, 2010  

Labor Day Means It’s Time to Pay the Piper

I’m fortunate in that during the summer months here in New England (which translates to, “a short period of time”), I can generally kick back and move at a slower speed than I do during the rest of the year. During this summer, I took this switch to an extreme. Yeah, I got some stuff done – I answered phone calls when they came in, I responded to email eventually and I raised some money to fight cancer by riding in the PMC. Looking back on it, though, I think I got less done this summer than during any other period in my life.

I’m not just talkin’ about the business-oriented stuff either. I cycled less, I played less tennis, I read less, I exercised less, I played golf only once (and that was only 9 holes) and I didn’t blog at all. All those projects around the house? They’re still there. Bills need to be paid? Not today. Stuff needs to be cleaned? It doesn’t smell that bad. Computer needs to be fixed? What’s wrong with pen and paper?

I guess there are some things I did more. I ate more, I drank more and I found myself cruising the web more. Check out my waistline for proof.

I have no excuses. This summer, the gods of weather smiled down upon us here in the northeast corner of the US. We had an incredible summer, weather wise, and for some reason I did my damndest to not take advantage of it.

I’m worried that this is my new status quo; that I’ve become lazy and slow; that I may have to rename this blog “1-Speed” or even “no-Speed.” So, I’m treating the advent of Labor Day as a kick in the ass. The bell has rung and the round has started. It’s time to get back to my fighting weight, step into the ring and throw some punches (OK, maybe I need to cut back on the boxing analogies). It’s time to start getting stuff done. My time as the least productive member of society is over . . . for now, anyway.

 September 7th, 2010  
 Misc Thoughts  

PMC 2010 Wrap-Up

It’s hard to explain why the people who participate in the Pan-Mass Challenge as riders and volunteers make such a big deal of it. For my part, I make it the center of my summer activities and the almost singular goal of my cycling training efforts for the seven months before the event. Like the others involved, I talk about it frequently and nag my friends about donating to the cause – fighting cancer. I think about it a lot.

The focus may all seem nutty if you don’t see it for yourself. The thousands of people riding (5,200) and the thousands more (3,000) supporting the ride; the people cheering on the sides of the road through every small town the riders travel; riders with the names and pictures of their family members killed by cancer on their backs and bikes; tractor trailers worth of food and goods donated by stores to support everyone involved; the woman on the side of the road holding a sign that says, “I’m a cancer survivor because of you.” It’s so impactful and meaningful that being part of it becomes a drug. Maybe even a way of life.

I guess that’s why I’m crushed that because of my previous knee injury, I couldn’t do day two of the ride (Bourne, MA to Provincetown, MA). A combination of obligation, guilt, desire and a deep down need for the endorphin rush I get from the athletic accomplishment all combine to make me miserable about not finishing what I started.

Fortunately, my knee held out for most of the first day, which I finished stronger than I expected to, although way off my personal best for the ride. The last 20 miles got tough. My right knee gave out and I had to pedal almost exclusively with my left leg which, like most of the left side of my body, has been ignored for most of its life – I’m very right-sided. This is hardly heroic. There are a few PMC riders who don’t even have two legs. I saw one rider with a prosthetic leg (from close to the hip) and another riding with one leg without a prosthesis.  Those guys are heroic . . and insanely strong.

The other heroes are those that donate to the cause. For my part, that’s those of you who donated to and supported me on my ride. This year, my supporters donated $8,950 (so far) to the fight, the most I’ve raised in any of the seven years I’ve ridden. To all of you, my apologies for not holding up my end. My heart was in it, but my body couldn’t back it up. I let you all down, though, and I feel terrible about that.

My family stepped up to fill in some of the hole I left by not riding on day 2, each of them volunteering for the event. My wife has volunteered for years, but this year even my kids got out of bed at 5:00am to participate. It was a real family effort.

For the first five years I rode in the PMC, my life was hardly touched by cancer. Since then, we’ve lost my mom (a multi-occurrence cancer survivor), my aunt Gerry (lung cancer) and my wife’s aunt, Bev (stomach cancer). Additionally, a very close friend who I have known most of my life was diagnosed with multiple myeloma, almost being caught too late. Scary, scary stuff.

Thanks you so much for your donation and support. As soon as I get my Steve Austin bionic knee replacement, I’ll be back in the saddle and prepping for next year’s PMC.

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 August 9th, 2010  

How We’ve Screwed Up Parenting – Reason #243

My good friend Dave sent this to me this morning. I laughed so hard I almost went into convulsions.

Source: SMBC

 July 26th, 2010  
 Misc Thoughts  
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Big Trouble in PMC Training City

Because of a nasty knee problem, I haven’t cycled much this year. Even so, I committed to ride in this year’s Pan-Mass Challenge, the largest charitable sporting event in the world and the primary fundraising activity for the Dana Farber Cancer Institute. For the last month, my training has been slow, but steady. Lots of stretching, ice, slow speeds and low mileage. My knee has hung in there with only relatively minor pain. That was, until a couple of days ago.

About five miles into a 30 mile training ride, my right knee gave way. It felt like someone hammered a large nail into the side of my knee. At first it just hurt on the downstroke, but as I struggled to get home, it hurt at all points of the pedal rotation. Eventually, I had to unclip my right shoe and just pedal with my left to get home (it’s not that weird, many cyclists practice pedaling with a single leg to perfect their form – I do it from time to time).

I’ve stayed off the bike for the last couple of days and probably won’t even test the knee again for a couple of more. I’m ignorantly confident that I can manage the situation. I’m going to try to get in to see a doctor before the PMC as well to see what can be done. If I’m going to have surgery on the knee, might as well inject it full of crap that relieves the pain beforehand, right?

On a more positive note, fundraising for the PMC this year has been terrific. Actually, it’s been the donors that have been terrific. Thanks so much to everyone who has expressed support for me and, more importantly, the cause. So far, I have $8,000 committed to support the Jimmy Fund, Dana Farber’s fundraising arm. If you haven’t had the chance to donate, and cancer research is a cause you desire and can afford to get behind, there’s still time (go here).

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 July 15th, 2010  

How Much Should I Look for in My Seed Round?

I often run across early stage companies in a real quandary about how much money to take in their first round of funding. That is, the round just beyond the Ramen noodle eating, avoid starvation round that is usually funded out of your own pocket. The round that really gets things going once you’ve established a team and product viability. The advice they often get – build a spreadsheet outlining fixed and variable costs over the next year or more. Estimate headcount, salaries, rent, capital equipment needs, etc. and, voila, you’ll have your number. That’s fine, of course, but the spreadsheet should be the end result of the planning process, not the process itself. In my experience, there are certain high-level guidelines that should be used to determine how much money should be taken.

Using these, you’ll ultimately have the data you need to plug into a spreadsheet and generate a cash flow estimate – one used for planning AND tracking cash flow – based on the high-level needs of the company and with an eye to future investment rounds.

My thoughts here hold true whether you’re pricing your round or, for the most part, if you’re doing a convertible note. I should also state that this post looks at the question primarily from the entrepreneur’s point of view, although is certainly aligned with the thinking of investors as well. As always, your mileage may vary. This is my opinion and it’s worth exactly what you’re paying to read it . . .

  • Take enough money to securely get you to a step up in valuation. I’m not talking about some marginal increase, but a real increase in valuation – double, triple or maybe even more. What creates that? Usually the achievement of some significant milestone. It’s great if that’s revenue or profit, but a large number of active users or even a major product release are good milestones to increase the perceived value of your company. It depends on what you’re doing. A web service is going to have different metrics than an enterprise software company which will have different  metrics from a hardware company, for example.
  • Take enough money to move quickly, but assume that you will not move as fast as you think you can. Don’t starve the company. Make sure you take enough money so that when you look back over any preceding month of operation you don’t say, “I could have done so much more with $X more.” Additionally, take into account that things will not always go as well as you’d like and, while you’re moving fast, you need to leave some space for stumbling on your way. Map it out as you see it, then add a dash of conservatism.
  • Take enough money to hire the key team members you need – that’s where your leverage is. Never, ever rob yourself of great human resources. Success begins and ends with the level of people you add to the team.
  • Valuation is less important than you think it is. Yeah, this is a hard one to buy into. If your valuation sucks, make sure you’re following the previous guidelines, swallow hard and take the same amount – the amount you actually need. If you are truly uncomfortable with how much of the company you’re trading for cash, go out and look for an investor who will give you a better valuation – but don’t try to do your startup on the skinny, it’s already going to be hard enough to succeed. Keep in mind that your odds of succeeding are not highly correlated with the amount of stock you retain.
  • Leave yourself some runway to close the next round. Many young companies forget this when planning for the uses and needs for cash. It’s unlikely that you’ll have someone at your door ready to write a check the day you run out of money. You wouldn’t want to hand over such leverage to someone anyway. Make sure you have enough money to fund you through the time and effort to get the next round closed – at least 90 days. 120 to be safe.

No, it’s not a science. In the end, the most important part is to get the money you need and to get moving. Time is your biggest competition and it works tirelessly 24/7 to kick your ass. Try not to get caught in abstract notions about valuation. Do a sensitivity analysis, it’s likely to be less important than you subjectively think it is. That’s not to say it’s unimportant, but you should think about what the valuation being offered really means in terms of what you take away from the company given various scenarios. Ask yourself what it is you want to achieve, personally. If the valuation doesn’t seem right after that, move on and find someone else to invest. Otherwise, take the money you need and start executing. And don’t forget the spreadsheet. It really is a good tool.

 July 11th, 2010