How to use your Android phone to get on the internet in the UK

Here is the simple process for getting your Android device online with a data SIM in the UK.  It’s terribly fun, I recommend it to everyone.

1. Before leaving, turn off your phone and do not turn it on again.  Some carriers reportedly will charge you roaming rates when people leave you voicemail if you turn on your phone out of the US, even if you never make or receive a call, because it’s “registered” there.
2. Pick up a SIM card from the local mobile store, wireless stand, fast food chain, gas station, vending machine, cabbage shop, or hobo.  I opted for the “Orange 3G card”.
3. Put card in phone.
4. Hope your phone is unlocked. If not, find a way to make international calls without your phone, and call the *international* support line for the carrier that sold you the phone.  Tell them you need the SIM unlock code and explain why.  Note that only the international support line will give it out (not the usual one), and then only sometimes.  If this fails, you’ll be exploring the seamy underbelly of the internet for the keywords “unlock phone”.  Been there, done that, don’t recommend it.  Other alternatives: travel without data, fly home.
5. Enter SIM unlock code.  Carefully.  5 or so wrong answers and your phone is a useless brick.
6. Get on the internet!
7. Just kidding.  Follow directions in booklet; go to www.orange.co.uk.  Fill out forms to load card with money.  Stare blankly at “postal code” section of credit card info and realize that they don’t support foreign cards.
8. Call 450.  Navigate phone tree.  Get stuck again when they need post code.
9. Curse at phone creatively until connected with an operator.
10. Explain situation.  Provide card info, including US address, which they will accept as your billing code.
11. Have operator ask you for UK post code “for your current location”.  Argue for a while.  Give up, google “UK post code”, and choose a result at random.
12. Provide a witty retort when your clever operator with a perfect Pakistani British accent observes that your post code is the same as that of Buckingham Palace.  Stand firm in your assertion.  Share a chuckle.
13. Put 10 pounds on the card.
14. Choose an oddly named bonus plan (e.g. “Dolphin”), which is mostly irrelevant, since it takes up to 72 hours to take effect, and you’re leaving in 72 hours.  Note that they won’t mention this detail until the transaction is done.
15. Tell them you want the 5 pound “250 megabyte” data package.
16. Get on the internet!
17. Ha ha, fooled you.  Still joking.   Find your APN settings.  Restore default. If this doesn’t give you something like “orangeweb” or “orangeinternet”, enter a new APN setting, name=orangeinternet, apn=orangeinternet, everything else blank.
18. Reboot.
19. Call back because internet isn’t working.
20. Discover that you need to pay 25 pence for tech support, which you can’t do, since you ignored my advice previously and only put 5 pounds on the card so you have nothing left.
21. Go through the “top up” thing, get a sales person, vent.
22. Kindly sales person explains that your internet stops working when you have 0-balance, a fact no one mentioned, and you couldn’t find out because if you have 0-balance you can’t call tech support.  Kindly sales person puts an extra quid on the account so it should work.
23. Get text message that everything’s working, which awakens spouse since it’s now past midnight local time and you’ve been at this 2 hours.  Disable text message sound.
24. Reboot.
25. Get on the internet!  For real this time!
26. Get text message that your credit card has been declined.  Get booted from the internet.
27. Get new text message that you have been inexplicably been granted 10 megabytes of internet, and please get the credit card thing sorted.
28. Get urgent email from amex saying that they declined your ten pound charge just in case you’re not you, despite the fact that you called them yesterday and told them you’d be getting a phone in England so please turn off the fraud alerts.
29. Use Google Voice to make a free call to Amex to give them a piece of your mind.  Have credit card reinstated.
30. Call up and have them re-charge the 5 pounds.
31. Get new URGENT VOICEMAIL from American Express fraud alert, waking wife again, explaining that your card may have been stolen.  Again.
32. Write bitter and vitriolic blog post.
33. Raid minibar.  Go to bed. (this step has not yet been tested)

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A Twitter, a Hoverboard, or something in between

There are two very special types of startups that you should know about: the Twitter Startup and the Hoverboard Startup.  If you’re one of these and don’t know it, you’re going to screw up your pitch.

Imagine walking in to hear a startup pitch its goods.  The CEO gets on stage, clears his throat, and starts talking about the number of teenagers in western countries, and their per capita disposable income.  As he drones on about trend cycles and market prediction, you rudely glance at the company summary and it says “Foot-propelled play device with gravitational repulsion field for friction minimization”, and you realize that he’s trying to pitch you a hoverboard.

You’re thinking about this:

and the slide he’s on is this.

You seriously don’t care about his viral strategy or exit strategy, you just want to know if he’s invented the secret of levitation.  If he has, you’re pretty sure the rest will follow.  If not, then… well, then you’re going to have some stiff words with the “friend” who suggested you meet.  A Hoverboard Startup is one where the problem is screamingly obvious, but the solution is prohibitively hard.  The only real question in a Hoverboard Startup is – how good is your solution?

Now imagine a second pitch.  Someone charismatic and exciting is painting their vision of a new future.

“Facebook has hundreds of millions of users.  But you know what?  It’s too complicated.  Here’s what we’re going to do.  First, we don’t host apps any more.  They’re distracting and a security risk.  Second, we get rid of pictures.  Too much storage.  Third, we get rid of profiles, or at least all but one sentence of them.  We also get rid of school and work affiliations, skip all the new stuff like location and checkins, and pretty much kill all the privacy settings so everything is just public by default.  Won’t that be AMAZING?”

You look confused.

“What’s left?”

“Well, you can friend people.  But of course we removed the feature where they have to confirm that you’re friends, so we’re going to rename it to either ‘following’ or ‘stalking’, we haven’t decided.  And you can post status updates to your wall. But we decided to cap those at 140 characters.”

“That’s it?”

“Yes.  It’s going to be huge!”

Now think about the questions in your mind.  You’d probably look at the technical chops of the founders, consider that what they’re trying to do is a tiny fraction of the complexity of Facebook, and assume that it’s not going to be very hard to solve the problem technically (you’d be wrong, of course, but that’s besides the point).  You’d just be sitting at there, staring in wonderment, going, “Why the hell would anybody care?”

In other words, this startup is the exact opposite of a Hoverboard Startup. A Twitter Startup is one where the solution is straightforward, but it doesn’t appear to actually solve any problem.

Now most startups are neither fish nor fowl.  Both the problem and the solution seems intuitively reasonable but neither one is totally proven.  But recognize if you’re a Twitter Startup or a Hoverboard Startup:

Twitter Startups

• Instagram (What exactly is the market for mobile photoshop filters?)
• AirBnB (Really, how many people want to sleep on an airbed?)
• CueCat (Do people want their own personal dedicated hardware barcode reader?  Oops – no, they don’t.)

Hoverboard Startups

• EnerG2 (Yup, if you can make batteries that hold twice as much juice, people will buy them.)
• Mint (If it were somehow possible to make personal finance like 500 times easier, then people would want that.)
• Steorn (Free energy?  Yup, that would be nice, if it were possible.  Wait! It’s not.)

If none of these apply to you – congratulations, you’re a normal startup.  Use the standard pitch deck template, and divide you’re time accordingly.  But if you’re a Twitter, you can almost skip the demo – you want to show customer research and traction, because the only thing they’re going to want to know is if anyone gives a damn.  And if you’re a Hoverboard?  Well, you’d better be levitating by the third slide, or your investor is going to be out of there.

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Why I sold my startup, Sparkbuy, to Google

Shortly after the sale closed, John Cook interviewed me about the experience.  He did a great job of transcribing all of my verbal gems, like “Maybe that is an economic way of looking at it, or something that I am unfamiliar with.”  I’m not even sure what that means.

It was the best I could muster in the middle of a crazy, exciting, wild time.  But looking back, I realize that there’s an important question there and I didn’t do it justice.  Selling a company can be a very lonely decision, so I want to revisit John’s question and share my thinking with others who might be making the call.

It was a great deal for the shareholders

Most VCs don’t care how long your company takes to show a return – they don’t get to re-invest proceeds of their deals, so if you exit early, the money sits in a bank account earning interest for years instead of contributing to their returns.  Since my investors were angels, they would look at the exit on a time-adjusted return basis.  Or put simply, if I could give them back their capital plus a great return in just six months, that could be a terrific outcome.

It was our #1 choice of acquirer

Most startups are acquired.  Actually, most startups fail – but of those that are successful, most are acquired.  Given that an acquisition was, one way or another, the most likely outcome for Sparkbuy, I compared Google to a list of about a dozen other potential acquirers.  They were at the top of my list.  If was going to go to work for The Man, I was more excited about The Man being Google than anyone else.  The employees (both of them!) felt similarly.  Even the investors appreciated the bragging rights of having a portfolio company sell to Google.
Further, the people who I would be working with were amazing.  Scott Silver has always been one of my engineering leadership idols.  After trying to recruit Phil Bogle to Ontela I knew I wanted to find a way to work with him.  While I’ve never been excited about having a boss again, Nick Fox was someone I actually knew I’d enjoy working with and learning from.

I was excited about pursuing the Sparkbuy vision at “Google-scale”

The Sparkbuy product was launched out of a personal frustration with consumer electronics shopping, but the problem is much broader.  It’s just hard to find reliable, accurate, unbiased, quantitative information about products.  Search engines favor old prose over fresh data.  Sparkbuy was about helping consumers make better decisions.

The team I’m working on now is taking that opportunity to the next level.  With business development resources, the Google brand, Fortune-100 budgets, and an appetite for giant risks, we can tackle problems at a broader scale than ever before – making consumer purchasing easier, better informed, safer, and faster.

Working a real job sounded like a good idea for a while

After eight years at startups, the idea of pulling a steady paycheck for a few years was seductive.  Some personal events, while ultimately amounting to nothing, made me feel like having great health insurance wasn’t a bad idea either.  (Soapbox sidebar: health insurance reform is key to promoting entrepreneurialism and small businesses in this country!)  I loved the idea of keeping a more regular schedule, and spending a bit more time with my family.

The money was life-changing

While I’m not in the position of my good friend Rand, who’s gone on the record saying that his life savings is $25,000, I was not previously wealthy.  The Ontela/Photobucket merger was a spectacular deal for all parties involved, and I didn’t take any cash of the table – I’m still 100% invested in Photobucket.  That means the Google sale accomplished three lifelong goals for me: allowing me to set aside enough to pay for my twin toddlers’ college educations, funding my wife and my retirement account, and giving us a financial cushion that means I’ll never have to work at a job I don’t love. It also meant that, overnight, I can pay some karma forward and start investing in startups that I’m excited about (more on that soon).

I get to swing for the fences

Some people are wired for the “billion dollars is cool” kind of risk that folks love to write articles about.  I wasn’t, at least not until I figured out the aforementioned three problems.  At least I was in good company, though – my new great-grand-boss, Larry, famously tried to sell Google for $1mm and failed.

But this lets me play the Shawn Parker game without regrets.  When I start my next company, I can swing for the fences.  Or self-fund it and do something that I love, without worrying about maximizing shareholder value.  Which brings us to…

The company was in a great position to raise money, but I didn’t want to

As the CEO of a startup, I’m dedicated to pursuing value for the investors who’ve extended me their trust.  One of the primary inputs to my decision making is how best to create value for shareholders over the life of the company – it’s not the only consideration in decision making, but it’s a big one.

One of the reasons I founded Sparkbuy was that I was excited to try a different way of building a company.  While I was at the helm of Ontela (now Photobucket), we raised over $30mm.  That’s a ridiculous amount of money.  We had a lot of fun and accomplished some amazing things along the way.  I worked with a team of fantastic people and was never happier than when I was going in to work to spend time with them.  If I had it to do over, I’d do it the same.

But I find there’s two type of people in the world – those who like refining one thing over and over and getting really good at it, and those who like trying new things.  You can guess which category I fall in to.  I wanted to try something different – a smaller raise ($1mm), angels instead of large VCs, and growing organically based on revenue.  That’s what I did with Sparkbuy, and it was a good decision when I made it.

But markets continued to heat up to a fiery glow.  The valuation of comparables in our space was shooting through the roof.  Competitors were raising rounds in the double-digit millions.  It was becoming increasingly clear to me that the best strategic decision for the company was to raise a large financing round at a lofty valuation and grow like crazy – but I wasn’t particularly excited about doing that.  In other words, what I thought was best for the company wasn’t what I, selfishly, wanted to do.

If I hadn’t sold, I would have raised money, and I didn’t really want to do that.

It was time to spin up a B2B strategy

Much as Sparkbuy’s direct-to-consumer website was winning rave reviews from users, there was new and substantial interest was on the part of other companies.  We were getting offers to do long-term deals with Fortune 500 companies that would generate huge revenues over a period of years.  Of course, pursuing those would have required raising a bunch more money.  Once again, this was what I did at Ontela; and once again, while it was fun, I wasn’t excited about pivoting Sparkbuy in that direction.

The biggest risk was still ahead of us

The bigggest challenge for any consumer startup is how to profitably acquire customers.  We knew from the start that this was the largest risk factor for Sparkbuy, and with the launch of our beta (a month before the sale), we were just starting to dig in to this problem.  I had a list a mile long of initiatives to drive profitable growth, but in the end all you can do is experiment and iterate, and it can take a long time to find the magic.  Our value as a company wouldn’t hit a new inflection point until we solved this problem, and it was a long ways off.

To sum it all up

Some of my investors were overjoyed.  Some of them were sad that Sparkbuy would never grow in to its own.  I’ve been called a sellout, and people have told me that I epitomize what’s wrong with entrepreneurs outside the valley.

It’s all cool.

I don’t claim my decisions are right for any other company, or anyone else.  This was not the hardest decision I’ve ever made.  It wasn’t even in the top 10.  There were a lot of moving parts, but at the end, it was simple.  Google hit my “life changing” number, provided a great return for my investors, gave me and my coworkers terrific jobs, and made it all happen six months from the day we were incorporated.  I’ll have other companies some day, and I’ll play them differently.  Your decision, should you be called on to make it, may be quite different – but I hope it leaves you feeling as lucky as mine has!

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Open letter to Mike Arrington: Please stop investing in startups

Hi Mike,

I’m one of your customers.

We don’t really know each other. We’ve chatted at a few events, you’ve covered some of my antics, but I’m mostly just a guy who reads TechCrunch a lot. I find it’s a pretty good place to see what’s important in the industry. And you and your team do some damn fine reporting on things the world wouldn’t know about otherwise.

I am product guy, not a media critic. But I’m a big believer that economic incentives shape behaviors in subtle and unmeasurable ways. And I think your decision to make investments in startups is going to make TechCrunch a worse product.

I can’t tell you exactly how. Are you going to be a little more likely to ignore competitors to your companies? Cover them, even when they’re not newsworthy, to show you’re not biased? Feel compelled to pull or throw punches, either to support or prove you’re independent of the companies you deal with?

I don’t know. But I think it’s going to happen, it’ll be subtle, and it’ll make TechCrunch worse.

I’m not making demands or threatening to leave. Just making a request, from one product guy to another: journalistic independence is a great feature. Please don’t cut it.

Best wishes,

Dan Shapiro

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The only wrong answer is 50/50: Calculating the cofounder equity split

(Note: there are great conversations about this article happening at Geekwire and Hacker News)

The question of equity brings out the most fundamental differences, perceptions, and values in an aspiring startup.  In fact the equity question, more than any other, may strangle a young company before it can even get started.  And that’s a damn good thing.

But before we get in to that…

Who’s a founder?

Facial hair alone proves insufficient to determine founder status

As straightforward as this question sounds, it’s a tricky matter.  The founder moniker is black and white, but the situations are all shades of gray.  Setting aside the philosophical question and focusing on the more useful economic one, though, there is a simple approach: founders are people who take a very particular kind of risk.

There are, quite roughly, three stages in every company’s life:

1.  Founding.  The only money the company has is what you put in.  You are getting no money out of the company.  The company will probably fail, and you will lose all the money you put in, plus the lost salary, plus you have to find a new job.

2.  Startup.  The company has money, either from investors or from revenue, and they give you some of that money every month.  Your salary is less than what you’d get at a big company.  50/50 the company fails and you have to find a new job, plus you’ve lost the difference between your startup salary and the BigCo salary.

3. Real company.  You get “market” salary.  It’s unlikely the company fails, and if it does, your downside is limited to  unemployment.

The rule is this: if you’re working for a company that’s so young it can’t pay you, you’re a founder.  If you are drawing a salary on your first day at work, you’re not.

What’s a founder worth?

A founder is defined by the inability of their company to pay them (or anyone else) for anything.  A founder’s primary job, then, is to get their company some money – either by raising investment or by generating revenue.  So a founder is valued by two things:

1) Their contribution

2) The market

The first of these is fair.  The second is  economics.  Both are essential.

And now, the formula

Of course, there can be no right answer – but this one’s not so terribly wrong.  To start out with, give every founder 100 shares.

Somebody’s got to get things started (5%)

Some startups are born running, with all founders on board from the beginning.  But others come from one leader who recruits the others.  You may or may not take the CEO title, but if you’re the one who rounded up the cofounders and talked everyone in to getting things done, add 5% to your holdings.  If you were previously 100/100/100, you’re now 105/100/100.

You know. For kids.

Ideas are precious, but dwarfed by execution (5%)

It’s a lie to say that ideas are worthless and execution is everything… but it’s not too far from the truth, either.  If you’re the founder who brought the original concept to the table, increase your share holdings by 5% (so if you had 105 before, you now have 110.25) Note that if the idea is implemented, or patented, or otherwise has some execution behind it, then…

The first step is the hardest (5%-25%)

Creating a difficult-to-replicate beachhead can give a fledgling company direction and credibility.  It can help with revenue and with financing.  If you bring a concrete start to the table – a critical, filed patent (not a provisional), a compelling demo, an early version of the product that isn’t quite there yet, or something else that means much of the work towards financing or revenue is already done – you get a boost of 5%-25%.  The key variation here is, “How much closer does this get us to revenue or financing?”

CEO gets more (5%)

Common situation: the split is 50/50 so that neither party controls the company.

Well, if you don’t trust your CEO with the majority of shares, you’re founding the company with the wrong person.  Market rate for a great CEO is higher than market rate for a great CTO, so the CEO job gets a bit more equity.  This isn’t fair – the work isn’t easier or anything – but it does reflect some market realities.

Fulltime commitment is expensive (200%)

If you’re working fulltime while your cofounders are working part time, you’re the pig. You’re working more, and you’re risking a lot more if the project fails.  Furthermore, part-time cofounders are a big minus to someone considering an investment.   Their equivocating will be expensive.  Add 200% to the shareholdings of all the fulltimers.

Reputation is the most precious asset of all (50%-500%+)

If your goal is to get investment, some people make that much easier.  If you’re a first-time entrepreneur partnering with someone who’s successfully raised VC dollars, that person is a lot more investable than you are.  In the extreme, some entrepreneurs are so “investable” that their involvement is a guarantee of raising funds.  (It’s easy to identify them: ask the investors who know them best “would you back them no matter what they do.”  If the answer is “yes”, then they are that kind of super.)   These super-preneurs essentially remove all the risk of the “founding” stage, so you should expect that they get the lion’s share of the equity from this stage.

This point doesn’t apply to most founding teams, but when it does, expect the super-preneur to take 50%-500% or more, depending on just how much more significant their reputation is than their cofounders.

Treat cash like an investment (varies%)

Ideally, each investor contributes an equal amount to the company.  That, plus their labor, earns them their “founder shares”.  It’s possible, though, that one founder may put in significantly more.  The price for that is high, since it’s the earliest, riskiest investment.  That founder will get more equity; to determine how much, talk to a good startup attorney about a reasonable value for your company and work from there.  For example, they might say that your company could reasonably be valued at $450,000 for investment purposes, so a $50,000 investment would merit an additional 10%.

There are more structured ways to do this, ranging from revolving credit lines with interest and warrants to convertible debt that converts in to common shares.  But these all mean increased legal bills and, more importantly, complex cap tables – something that can scare off outside investment.

The final accounting

At this point,  you’ll have something like 200/150/250.  Just add up the shares (600, in this example) and divide each person’s holdings by that number to get their ownership: 33%, 25%, 42%.

If you have equal shares, you did it wrong

A couple of years ago I was asked to give a talk at a continuing education series for attorneys.  I asked to see the class list, and opposing counsel for a deal I was working on was being there, so I figured it was probably a good idea to do it.

I asked them what to talk about, and they helpfully replied “startups”. I pressed for more detail. “You mean like generic startup experiences?  Legal issues startups face? Advice for attorneys?”

“Yes, exactly like that!” came the enthusiastic reply.

Clear direction in hand, I started musing on the early days of Ontela.  Our company started as just two of us, Charles Zapata and I, brainstorming in a basement.  We covered a ton of ground – generating a million ideas an hour, each better than the last, on everything from business concepts to core values to better ways to file expense accounts.  No matter what came up, we either agreed, or quickly resolved our differences.  Life was good.  We split the equity 50/50.

It wasn’t until six months later, when we’d quit our jobs and committed our savings, that we nearly destroyed the company with our first real argument.

The advice I gave the lawyers was this: “The most common cause of startup death is founders who can’t resolve their differences.  Nobody hears about it; they just pack up and go home before the company ever had a chance.  If there’s one thing you can do to help your clients – really help them – it’s to get the hard questions on the table early and help them work through them together.”

Mark Suster talks a bit about this in this four minute video clip about “the co-founder mythology“.

Solomon was unavailable

50/50 isn’t a business decision, it’s a compromise

You need to get used to hard questions.  You need to get used to trusting each other.  You need to get used to the idea that you’re not all equal.  You need to have the difficult discussions about responsibilities, contributions, roles, and compensation.  You need to do  it before you make commitments to investors and employees.  And if you find that the only way you can get a decision made is by compromising – then you need to stop now, before the price of failure climbs higher.

There’s no way around it – you’re going to have to split the baby, but it doesn’t require the wisdom of Solomon to get it right.  Take your time, keep a level head, and remember: this is just the first of the decisions you’ll be making together for the rest of your company’s life!

PS: Joel, you’re awesome, but I couldn’t disagree more

Joel Spolsky is one of my favorite authors.  He wrote a thoughtful piece about the same subject that reaches very different conclusions.  Here’s why his article is wrong:

• It confuses “easy” with “fair”.  If you’ve had two successful exits already while I’m doing my first startup, it’s easy but not fair to split it 50/50.  It’s fair but not easy to reach a more accurate split.
• It advocates avoiding conflict so you don’t “argue yourselves to death”.  That’s exactly the wrong approach: if you’re going to argue yourselves to death, do it now when you don’t have investors and, worse, employees (“Mom and dad are fighting again”).
• It gives too much equity to employees who are drawing salary, at the expense of the founders.  The majority of founders work without salary for companies that ultimately fail.  Employees are at least guaranteed a salary.  The difference in risk is monumental. Nivi provides a lot more detail here explaining why founders should get a lot more stock than employees.
• It doesn’t reflect market realities.  A typical Series A allocates 20% for the employees.  Joel’s model has 33% for the employees, which means just 33% for the founding team.
• IOUs are nearly worthless.  Most companies don’t succeed in raising money or getting profitable.  Of those that do, many investors will require that IOUs be waived as a precondition of investment.  A $1 IOU has an expected value of nickels.  The right solutions are either convertible debt (for investment) or equity adjustments (for anything else).
• It’s worth noting that, by the way, Joel is spot on that founder vesting is required in any cofounder situation.

Joel’s already successful.  I believe this is his first startup with cofounders and investors.  This looks like a great, idealistic set of ideas – but it’s economically unsound, and doesn’t reflect the majority of the market out there.

Note: I’ve only founded two VC-backed companies myself, so I’ve vetted this analysis with a bunch of folks to access a broader experience base and make sure I’m not out in the blackberry brambles here.  That said, a few VCs (including Fred Wilson, one of Joel’s investors) have chimed in to endorse Joel’s analysis, so perhaps he’s not so crazy either.

Thanks to Bill Bromfield, David Aronchick, Galen Ward, Joe Heitzeberg, Rand Fishkin, Sarah Novotny, and Tony Wright for providing feedback on drafts of this.  Mistakes, overly broad assertions, and incendiary observations are mine, not theirs.

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My new company, Sparkbuy, is public

Check it out at www.sparkbuy.com and see what I’ve been working on for the past 6 months or so. You can also read about it:

• The New York Times
• The Wall Street Journal’s All Things D
• Seattle’s own Geekwire

Drop me a line and let me know what you think.

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How much are startup options worth?

Startup pay kind of sucks.

This is not a well-kept secret.  A great startup with a dozen or so people will typically pay its employees about a third less than a big company.  Some will argue that that’s because of the value of the equity that startups give you.  I argue that that’s the price of doing something that’s more fun but of unproven economic value.

But regardless of why you’re doing it, there’s no question that startups ply you with ownership in the company, typically in the form of stock options.  They will argue that there’s tremendous value in those shares, more than you’ll get from a big company, but they tend to get all nervous-looking when you ask them how *much* value.  Now there’s no doubt that 1000 options on stock in a startup with 1mm shares outstanding (0.1%) has a lot more upside than 1000 options on stock in google (0.000003%).  This of course raises the simple question: what are they worth?

I’m going to give you a few tools you can use to take a swag at that value.  More importantly, I’m going to give you a checklist of key questions to pummel your potential new employers with that will simultaneously put you in a position of much greater knowledge, and making them think you’re a badass negotiator.

Note that many people would prefer you not know this stuff.  At most startups, the equity’s worth a lot less than you might imagine (as you’ll see below).  One of my favorite bloggers, Mark Suster, argues that you should just assume the equity is valueless and be pleasantly surprised if you find otherwise.  This is one of the reasons I admire Mark – he’s so good at closing candidates that before he does it, he takes on voluntary challenges.  It’s like he’s working on an xbox achievement.

Me? I want my potential new hires to know exactly what they’re getting, erring neither high nor low.  I don’t want them misled with a number that’s too big, or there’s hell to pay when they realize they’ve been had.  And I don’t want to sandbag, because closing a hire is hard enough without telling people to ignore the equity upside.  So that’s what I’m here to tell you: how to know if you’re getting a good deal from a startup.  And my secret ulterior motive is this: I usually give my employees a great deal on their equity.  That means that if they’re informed consumers, my companies’ offers look awesome compared to anything else they’re seeing.

Let’s start with the basics, which are completely misleading.  Then I’ll get to the important stuff.

The value of a whack of equity is this:

Quite simply, it’s your percent ownership times the company’s value.  Seems simple enough, but it’s totally wrong.  There’s a little reason why and a big reason.  The little reason is that the above equation describes the value of shares.  You’re probably receiving options.  An option is worth less than a share.  How much less is excruciatingly difficult to model accurately.  It’s about the same before your first financing round, but it can be a meaningful difference if your company has taken on a few subsequent rounds of capital.

The big reason is something investors don’t like to talk about, but here it is: the existence of preferred, “investor” shares significantly devalues regular, common shares.

This isn’t some sort of rant: it’s basic economics.  You see, investors typically take rights when they invest that put them “in front” of regular investors.  If they invest a million bucks and the company sells for a million bucks, they get their money back and everyone else gets nothing.  It’s called a preference, and Brad has explained it much better than I can.  It has a colossal impact on the expected returns.  They also often have something called participation, meaning that after they get their money back, they continue to get returns as if they hadn’t.  And then they have a set of terms called “protective provisions” which (more Bradness) explicitly allow them to block actions that are in the best interest of the company’s shareholders, as a whole, and supported by a majority of shareholders.

Back when the IRS allowed such things, the rule of thumb was that common stock was worth one tenth as much as preferred stock.  And the “value of company” number, above, is a preferred stock number.  Yikes.

So that’s the bad news: options on common shares in a venture funded company have a pretty crappy book value.

If you thought the company was worth what the IRS does, you probably would just take Mark’s advice and ignore the equity.  But there’s other ways to look at it.

Another, quite reasonable way to consider the value of the options (or at least their value to you), is to look at what you predict they’ll be worth.  Most startups that try to sell the value of your options do this in an optimistic (some might say “false”) way.  I’ve heard the phrase “Our company just wouldn’t accept an offer of less than $500,000,000″ uttered by recruiters.  But there’s a right way as well as a wrong way.

The basic math for this one is:

that means you take your shares, divide by total shares, and multiply by what you think it’ll sell for.  Of course, nothing’s that simple.  You have to:

• Account for the possibility that the company may fail
• Consider dilution from subsequent financing rounds
• Subtract any preference
• Account for any participation
• Subtract bonus/retention/carveout packages

and a bunch of other tricks that investors (and management) can use to manipulate the return curve.  This becomes unbelievably complicated, since key factors are things like how good a negotiator your CEO is.  To try and capture all of this, I banged out a set of heuristics (definition: “statements people will argue about”) that you can use to make a crude estimate.

1. Do you believe in the company?  Really, really believe it’s going to be awesome?  Feel in your guts that it’s going to be something amazing?  90% of new companies fail, so if you don’t, then you should assume your stock is worthless, and stop here.  Also, you should go work elsewhere, because life’s too short.
2. Ask the company: “What is your expected exit range, and what comparables did you use to get there?”  (in English: how much will you sell for, and who do you use as a basis for comparison).  If you agree that this company looks like the comparables, then take the low number and divide it by 2. If they say it’s going to IPO, divide by 10 instead. This is X.
3. Ask how many rounds have been raised, and how much more they expect to raise before they exit.  Add them together, then double them, to get Y.
4. Ask if there’s a preference, and if so, what multiple.  Ask if there’s participation, and if so, is it capped.
5. Cube the preference (as in, 2 x 2 x 2).  That’s Z.
6. If there’s a capped participation, add 1 to Z.  If it’s uncapped, add 2.
7. Ask who’s on the board.  If a majority of board members are employees/founders, do nothing.  If it’s a 50/50 balance between founders and investors, add 1 to Z.  If it’s tilted towards the investors, add 2 to Z.
8. Now for the grand finale:

And that’s what they’re worth.  Here’s an example:

You’re being offered 0.1% of a great company that thinks they’ll exit for $250-500mm.  They’ve raised $5mm and expect to raise $10mm more.  Terms are 1x preference, capped participation. The board is evenly split between founders and investors.

X: 250/2=125
Y: 15*2=30
Z: 1^3+1+1=3

125-(30*3) = $35mm.

You should consider your shares to be worth 0.1% * $35mm = $35k.

I love startups.  I love it when people get rich from startups.  I want you to join a startup, and I want it to shower you with riches beyond your wildest dreams.  I want you to blow all this math out of the water.  It’s all guesstimates anyway… but it’s better than fencing left handed.

Special thanks to Dave Schappell of Teachstreet, Rand Fishkin of SEOMoz, and Tony Wright for proofreading and edits.

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What it really means to be a startup CTO

I just wrote a guest post on what it really means to be a startup company CTO over on my friend Scott Porad’s blog. Read it here.

Also… I started a new company, Sparkbuy, which I think I forgot to mention.  We’re in stealth mode but launching in just over a week.  Follow us on Twitter so you get an invitation to the private beta!

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Your secret Twitter account, isn’t

I was reviewing a student resume today.  It was quite outstanding – no hesitation about recommending the candidate highly.  If there was one thing that I could nitpick about, though, it’s that I like to see a resume that includes a bit of an online footprint.

For a developer, point me to your github or stackoverflow account.  For an MBA, let’s see a clever website you banged out that’s delivering a couple hundred bucks a month of adwords to your bank account.  For a marketing grad, show off your blog or your twitter account that may not have much in the way of useful content but still manages to have a ridiculous number of followers.

A momentary digression: Lately, I have been experimenting with www.gist.com and www.rapportive.com.  I’m still learning to get the most out of them, but I can safely say that if you’re not using at least one of them, you’re a little bit stupider than you should be.  Don’t take it personally: this category of tool is, quite simply, synapse augmentation.  If you have it, you’re a little sharper, a little more able to connect the dots, a bit more on the ball than if you don’t.

One of their cool party tricks is a little known API capability.  Did you know you can look up someone’s user account on Facebook, Linkedin, Twitter, and elsewhere by email address?

Right.  So I didn’t google this guy (and if I did I wouldn’t have found him, since his name wasn’t anywhere on his twitter account).

I just clicked the big blue button right next to his email that linked me to the twitter account that was tied to his address.

I’ll spare you the results, but suffice it to say: if you’re building a secret Twitter account, be sure to use a secret email address for it too, OK?

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How to read a patent in 60 seconds

Someone’s claiming you’re infringing their patent!  You need to figure out how bad the situation is.

Or… your boss has asked you to take a look at an old patent you wrote, and see if someone else is infringing it.  And you have no recollection whatsoever, because it takes an average of nearly four years for a patent to be examined, so by the time anything interesting happens you’ve forgotten all about it.

Or… you’re just reading one of eighty hojillion Slashdot stories that use the title of the patent to write a “guess what obvious thing got patented” story, but you’re smart enough to know that the title isn’t actually the invention, and are curious what the real dirt’s about.

It can take hours or days to fully evaluate a patent.  When time’s short, here’s the quick and dirty way to figure out what the patent covers, usually in under a minute.

Step 1: Skip the title

The title of the patent can be just about as general as the author wants; for example, here is the the guy who patented the Tool.  It often describes the thing being improved on – not the new invention.  A patent titled “Virtual Desktop Manager” does not actually patent virtual desktops; it covers a particular set of features of a specific virtual desktop management implementation.

Step 2: Skip the drawings

Patent drawings are mostly similar to high school notebook doodles except that they cost $5,000.  They’re generally impossible to read and only indirectly have a bearing on the enforceability of the patent.  The occasional exception exists: the incredibly edifying flowchart. the drawings that look like a giant gummy bear (because the invention is, actually, a giant gummy bear) and sometimes a picture is simply worth a thousand words (particularly when that picture depicts the inventor, one Mr. Edward L. Van Halen, demonstrating proper use of his invention).

Step 3: Skip the abstract

In other fields, the abstract is your best friend: a short, direct summary of the major points of a paper.  Patent abstracts are at best meandering and hard to read, and at worst deliberately misleading (so you think you’re in the clear, do whatever you planned to do, and then get sued anyway because the abstract has no bearing on the enforceability of the patent).

Step 4: Skip the specification

Now we’re getting to the meat of the patent!  And also skipping it.  You don’t care about the background, or the field. You don’t much care about the related art.  The brief summary of the invention doesn’t tell you what’s important; the description of the drawings is generally incomprehensible (unless it’s Edward L.). And the detailed description will send you catapulting in to catalepsy, while simultaneously not separating what’s actually novel and invented from the stuff that everyone knows already.

Step 5: Find the independent claims, and read them

The claims are the only part of the patent that have any actual legal enforceability.  While they’re still a pain to read, they’re forced to be one sentence so at least they’re relatively short (modulo the occasional run-on sentences half a page long).  They can be wicked difficult to parse in detail, but a skim will get you pointed in the right direction. This page also offers a decent primer.

Step 6: Back to skipping – toss the dependent claims

Any claim that starts with “The _____ of claim _____” is essentially a refinement or detail with narrower scope than the parent claim – if you infringe the baby, you’ll infringe the daddy too.  Skipadoodle.

And that’s it!

Getting sucked in to a patent dispute is no good for any entrepreneur.  By the time it’s done, you may be able to recite 40 pages of patenteese by memory, and have learned your Markush from your Jeppson.  But if all you need is a quick summary, just cut directly to the independent claims.  You’ll be done in a minute.

Big thanks to Adam Philipp at Aeon Law (who I use and heartily recommend) for giving this article a sanity check.  Also huge thanks to Tom Huseby, who introduced me to this clever trick.

Bonus information: how the patent office reads your patent

Pretty much the same way, most of the time.  They read the independent claims, then reference the drawings, and then move to the specification if a term or concept is unclear.  If you’ve got more than a minute, you won’t do wrong by following their example.

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