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Camping like a startup

Posted: July 6th, 2013 | Author: | Filed under: Startups | 2 Comments »

Originally published on Sulia

We went camping with the family this weekend. We’d never done it before. That’s OK, first time for everything.

We spent a lot of time figuring out our location, because that would be hard to change later. We didn’t worry much about our precise campsite until we got there and wandered around a bit.

We asked some folks with lots of experience for advice. Most of it was good, some was contradictory. A lot of it was ignored.

There were a few problems we knew we needed to solve, like how to build a fire. Read up on those beforehand.

Read lots of other “how to” stuff, which did build our confidence but mostly just killed time before actually doing it.

We put it off for a long time because it was scary. When it was done, we were poorer, wetter, smellier, and a lot happier than when we started.

I highly recommend camping with the family.

And doing a startup.

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Shark Tank: The 3 worst startup mistakes made on TV’s best reality show

Posted: May 21st, 2013 | Author: | Filed under: Startups | 3 Comments »

This article first ran as a guest post in Geekwire.

For a long time I’ve felt like I must be either the first or last entrepreneur to discover the ABC series Shark Tank.  For the uninitiated, it’s pure startup voyeurism: a company stands in front of a panel of 5 plutocrats, pitches, and either gets an investment or gets laughed off the stage.  It wasn’t until Jeremy Liew’s great review of the latest episode that I realized I wasn’t alone.

But watching Shark Tank, I find myself grimacing repeatedly.  It’s like nobody pitching has ever read a half-decent book on negotiation. I keep seeing the same mistakes, over and over again.  Here are the three worst.

Negotiate

By far the most embarrassing mistake any of these poor companies make is actually failing to negotiate.  They show up and make their pitch.  They get asked some questions.  Suddenly, the sharks are piling on about what’s wrong with the deal. The entrepreneur is visibly flustered.

Suddenly, one of the sharks floats an offer.  Maybe a second one joins in.

You can see the look of gratitude and relief on the entrepreneurs face.  How gracious of them to offer to invest in their flawed child!  How generous of them to help.

Pshaw.  None of these folks are chumps or charity cases.  Do you know why they trash your business before making an offer?  So you’ll take the offer.  It’s not one of the nicest negotiation techniques, but it’s plenty effective.

Here’s the simple rule.  If someone makes you an offer, it’s because they’re interested.  If they’re interested, you should negotiate.  Not accept; negotiate.

Of course, there are right ways to do this and wrong ways to do this.  You’ve seen plenty of entrepreneurs on the show (and in life) start grandstanding about company value, only to have the Shark shake their head and declare themself “Out”. Don’t do that. Don’t be ridiculous.

Instead, make a reasonable and polite counteroffer.   “I’m really excited by the prospect of working with you.  How about 20%?”  Even if they appear to be tottering on the edge of leaving the deal (and remember that they have every interest in making you think they’re about to bail for maximum negotiating leverage), a polite response like that won’t hurt anything.  The worst you’ll get is a “no”, and now they know that you’re not a total pushover.

And of course, if you’re a hot item – if more than one shark is interested – make them bid!  Get them each to give you numbers, and don’t let them collude to drive your price down.  With multiple offers, use a line like this.  “Each of you would be a huge asset here, but my goal here is one fully-committed partner and the best deal for my shareholders.”

Know what you want

You’re going to come in with something clean and simple, like “$50,000 for 10% of the company”.  They’re going to counter (because unlike the contestants, the Sharks always negotiate) with something like “$100,000 for 8% and a 5% royalty”.

When this happens, people get this funny look on their face, like Mr. Wonderful just sprouted wings and started handing out gumdrops.  There’s no excuse for that.  The Sharks have a limited array of tricks up their sleeve, and you should have considered all of them before setting foot in that room.  Here’s the exhaustive list (please comment if I’ve missed one):

Stake size: The most obvious.  They’ll offer the same money in exchange for more of the company.  This is easy to plan for by deciding ahead of time on the worst case dilution you would accept.

Controlling interest: If the ownership is 50%, then no major decisions can happen without both you and the Sharks agreeing. If it’s 51%, then they can fire you the next day and liquidate the company if they think that’s a good idea.  And don’t fool yourself – if things are going sideways, they probably will.  Decide what you can live with.  If it’s 51%, remember the words of Mr. Wonderful: “I can fix you, but you probably wouldn’t like how I would do it.”

Number of Sharks: Most entrepreneurs get giddy over multiple investors (or, as they’re known in the startup parlance, “party rounds“).  Truth is, if you have more than one or two Sharks in the deal, you’re getting a lousy deal.  First, because each of them has a comparatively small stake, and therefore a small incentive to help.  Second, because if you’re in a bind, each of them reasonably expect one of the others to help out (the Bystander Effect).  Third, because the alternative to being in the same deal is offering competing deals – since that didn’t happen, you almost certainly took it in the shorts on valuation.  There’s only one situation where multiple sharks in the offer is good: when they are getting a 50% or greater interest.  That’s because while one person with 51% runs the company, two people who split the round are each just 25.5% owners.   If I was giving up 51% of my company, I’d want that stake split between as many Sharks as I could get – since my vote, plus any one of theirs, would constitute a majority.

A royalty:  You should know ahead of time what kind of royalty your business can support, and realize that a never-ending royalty seriously limits the long-term viability of your company by permanently lowering your margins.  And realize that once a shark gets their money back, they have a much smaller incentive to see you succeed – people are more motivated by fear of loss than opportunity for gain.

Help:  Some of the sharks have specific assets that may be useful.  Mark’s got stadiums and movie theaters, Damon’s got retail distribution, and so on.  Many of the deals are done because the entrepreneurs want access to those networks.  Do your homework before you get on so you know what help you can realistically expect from who.

Contingencies: This is the one that kills me.  If they say “I will invest contingent on X”, that’s the same as saying “I won’t invest, but might change my mind if you do X”.  A typical structure is that they will invest contingent on a valuable introduction to Their Friend Abe going well.  Well, real investors introduce their companies to Abe, and also Belinda, and Charlie, and Dolores, and a whole alphabet of partners because they’re committed.  Contingencies are just shopping around, saying “I’ll see what my friend thinks”.  Avoid offers with contingencies if you have any other options.

Don’t ever leave the room

“I’ll offer 25%.”

“I’ll offer 20%!”

“I’ll do it for just 18%!!!!… wait, could you leave the room for a minute?”

Pop quiz: when you return, your options will be:

a) 25%, 20%, and 18% because they just wanted some private time to talk about how much they liked you

b) 15%, 13%, and 11% because they’ve been negotiating against each other while you were gone

c) Just 18%, because the other two dropped out

d) 30%, but good news!  We’ll all be investing together to help you.

Don’t let Sharks collude.  There’s a reason the federal government outlaws business collusion: it drives the prices in the wrong direction.  If the Sharks try any of the “please step out for a moment” shenanigans, just let them know you’re on to their tricks.  Explain that you want one committed partner who doesn’t need to seek the approval of others, and if you walk out the doors you’re not coming back.  They only do the “step outside” when they really want a deal, so all the leverage here is in your court.

Of course, the most egregious error here is people who actually volunteer to leave the room.  Don’t call your spouse.  Don’t call your mentor. Don’t call Steve Wozniak. And for heavens’ sake, don’t go outside to talk to your cofounder who’s standing right there. Do your homework up front, know where everyone’s bottom line is, and trust your cofounder to implement the strategy you discussed without going outside and whinging about it first.  Then make the deal, or walk out with your head held high.

Life is Shark Tank

I love this show because it’s the only reality TV I’ve ever seen that feels real.  I’ve had friends sell companies for the original offering price. I’ve stared stupidly at an angel investor, finding myself totally thrown by the suggestion that we add a board member. And I’ve knowingly pitched a room full of angel investors, where the actual printed agenda  calls for me to walk out and sit quietly in the hallway where they collude on price.

If you haven’t had the pleasure, pull up a comfy chair and watch a few episodes.  Just remember when you watch Shark Tank: your role models aren’t the entrepreneurs.  They’re the Sharks.

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Five Killer Kickstarters

Posted: April 30th, 2013 | Author: | Filed under: Startups | 7 Comments »

Dream of striking Kickstarter gold, but lack inspiration?  I’m here to help.  Don’t forget to hook me up with a few freebies when you get your assembly lines rolling.

Optimal Notebook

Lightweight, distinctive looking, with a built in holder for a standard pen.  Bonus points for features like:

  • Water resistant paper
  • A cover that can be personalized (laser blasted, embossed, available in different colors)
  • Pages that can be customized (ruled, patent notebook, page numbers, or a mix)
  • Cheap enough I can order a dozen of them
  • Some sort of variety pack that clocks in at <$50 that would make a nice gift

Lots of notebooks out there, but it’s cool to have something different from the pack for a product that you carry with you all the time.  And what are notebooks for, if not expressing yourself?

Tablet-Powered Laser Show

Closed loop galvos and ILDA format playback from a microSD card.  Translation: draw pretty pictures on your phone/tablet/computer, and it will draw them on the wall.  Bonus features:

  • Single color version under $100
  • Multicolor options 
  • Maybe a cheap version with open-loop scanners for beam patterns and lissajous patterns
  • Companion, open-source apps to let you animate – either design a show, or draw on a tablet and have the show display your drawing in realtime
  • External, standard battery connector so you can run it for hours on a cheap hobby LiPo

There are a few outfits out of China starting to play in this space, but I’m pretty sure their software is going to be hopeless.  It’s an area where some Kickstarter innovation could really transform a project.

Combination Airboat, Car, Snowmobile, and Airplane

Someone on RC Groups invented a completely amazing combination airboat, car, snowmobile, and airplane.  Air Hogs did a very respectable toy version called the Storm Launcher (now discontinued) that was a blast to drive and terrifying to fly. Then they basically disappeared.  I have one. I built another one. They’re amazing.  Most fun RC gadget I’ve ever played with.  And they’d make for a great Kickstarter video.  Bonus features:

  • Gyro stabilization (because it now costs less than $20, and these things are buggers in the air without a little help)
  • Two motors, so you can steer with differential thrust – more effective than rudders for turns when it’s driving on land
  • Waterproof container for the electronics
  • Ridiculously overpowered for driving on the grass, taking off from still water, carrying cameras, etc

Watch this horribly transcoded commercial for the original Storm Launcher and I bet you’d be backing this bad boy at the $99 level.

Fashionable button up shirts that you can wash

Kickstarter’s got some sweet looking shirts.  But none of them include care instructions.  I’m going to go out on a limb and guess that they’re not machine wash- and dry-able.

All the department stores carry these 50/50 cotton/rayon shirts that are basically unwrinkleable.  The fabric’s kind of chinzy, but you can bang them through the washer/dryer cycle over and over again, wad them up in your suitcase, and they still work.    There’s probably nicer versions of these fabrics.

I see no shortage of fine Kickstarter apparel humanely plucked from organic plants and mammals of all sorts, but I want something that I can put in the dryer after my children regurgitate hummus on it.  That still looks good (after I get the hummus out).  Bonus features:

  • Super duper custom fit
  • Buckets of color options
  • I got nothing else on this one.  It’s a shirt.

Please, hook me up, Kickstarter.  I’ll buy the 5-pack.

A way to replace all my keys with one sleek thingamabob

Thanks to Elan Lee for pointing out Keyport, who did exactly the thing I described below.  I will be acquiring one shortly.

I have a bunch of keys, on a keyring.  This is absolutely unacceptable.

How about something that replicates the business part of the keys – the bit with the bumps on it – and lets them slide safely in to a sleek, common head unit?  You could use a service like Shloosl (not a typo) to fabricate the keys so you don’t need to part with the originals to make the production work.

Imagine something like the picture on the right, but with all of your key bumpybits inside instead of just one.  You might be out of luck with your fancypants car keys, but your door, mailbox, and whatnot?  Put them all away tidily!

Goodbye unacceptable keyrings.  Hello overfunded Kickstarter project.

A 3D printer that’s imperceptibly different than the 147 other 3D printers on the market

Just kidding.  You got that one covered, Kickstarter.

 

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My startup needs someone with a sexy voice

Posted: February 18th, 2013 | Author: | Filed under: Startups | 8 Comments »

I had an inspiring coffee meeting with an early stage startup today.  They have a clever and differentiated product, revenue traction, and great headway on their seed round.

It’s a B2B business and the CEO’s an experienced salesperson.  He knows exactly which businesses need his product and the title of the person who makes the buying decision.  He’s come up with a great sales approach – if he gets 30 minutes with the buyer, he’s very likely to close a 5-digit sale.

His challenge these days is scheduling sales meetings.  He’s got a fantastic leads list, but someone’s got to call them and convince them to commit to a face-to-face sales call.  We were just wrapping up when he remarked, “I just need someone with a sexy voice to get these guys on the phone.”

I froze.

I’d been here before.  And when the moment came, I didn’t say anything.

Not this time.

I stepped back and… agreed with him.  I told him he was right that outsourcing the first step of coldcalling – just trying to schedule a meeting – was probably a good idea.  I encouraged him to line up a few more calls himself before outsourcing, to make sure he could give good direction to the person he hired, and we discussed the pros and cons of having the person local versus remote.

Then I took a deep breath and told him that he was making a big mistake*.  While the explicit message he told me was about sales strategy, there was a very strong implicit message: “I’m judging my staff by something other than how effective they are”.

There are a few problems here.

  1. The language will both alienate some people he interacts with (let’s call them “thoughtful people“) and encourage others (for the sake of argument, we’ll call them “jerks“).  He’s a nice guy.  I suspect he’d rather spend his long workdays in the company of thoughtful people than hanging around jerks.  But with language like this, that’s not what he’s going to get.
  2. This is more or less a case study from the “job descriptions that get you a quick trip to court” file.
  3. It’s totally counterproductive.  A sultry-sounding idiot will get him nowhere. What he really wants is someone persuasive.  Whether that’s Tony Robbins, Oprah Winfrey, or Jessica Rabbit – he just needs someone who gets the job done.

He started to argue, then stood quietly for a minute, and told me he appreciated the feedback.

I got an email from him just now.  He told me that it never occurred to him that his language might be off-putting.  He told me he’s in the middle of recruiting right now, and thanked me for helping him make sure he doesn’t alienate great candidates.

He’s a promising entrepreneur and I have high expectations for his company.  Sometimes we all misspeak; I’m glad I could give him a friendly nudge.

Addendum: a few people have rightly pointed out that his language was not gender specific.  He might have meant that he needed a sexy guy to get the guys on the phone.  Of course regardless of what he meant, my concern is the same.  He doesn’t need a sexy creature, he needs an effective creature.  And thoughtful people don’t want to work in places where the CEO is evaluating how sexy they are in the course of conducting business.

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A Review of 3 Hacker News Jobs Listings

Posted: February 16th, 2013 | Author: | Filed under: Startups | 7 Comments »

Hacker News is an interesting lab for job postings.

It’s a target rich environment, so you know the right people are reading. Unlike many sites, you can’t pay to rank higher or show your headline in blue.  There’s no category search.  The rules are simple: if Y Combinator invested in you, you get your dozen words.  If they didn’t, you don’t get to post at all.  Best of all for our investigation, there are a lot of great minds tackling the problem (the problem being: how to get more great minds).

So I was surprised when I did a quick survey of the postings on news.ycombinator.com/jobs. Here were three representative samples of what I found.

Grouper seeks Product Engineer

Wheeee! There’s a company called Grouper! They’re seeking a Product Engineer! And… um, who’s Grouper? And why on earth would I click on this, unless I click on everything, because I am desperate?

It’s a shame the title’s so terrible, because if you do click through it, the job post is actually quite well written.

Come join FarmLogs in bringing the world’s farms online

Better! If you read their job description, they really want someone with passion around farming. While I don’t have demographic data, I’m going to guess that this is pretty unusual trait among the typical Hacker News clientele.

Now, they have an obvious omission – they didn’t mention who they were looking to bring onboard. From this title, it’s unclear if they’re hiring Ruby devs or door-to-door wormbed management software sales representatives.

But that’s OK. Because the goal of the title is not to inform, or promote, or educate: it’s to get the perfect person to click on it. And FarmLogs’ perfect person is going to say, “holy crap, a farm tech startup?” and click on the link out of outright curiosity if nothing else.

Android Hacker? Come take on the Telecom Giants

This is my favorite of the bunch. Given limited real estate, they prioritized wisely.  They tell the reader what kind of person will be a good fit.  They explain why the job is going to be different and interesting.  And they make it sound like an invitation to go on Gulliver’s Travels.  Of course, you can’t do that in a few dozen characters without cutting something.  So what did they cut?  Their company name.

Genius.

Their perfect candidate’s gonna smirk, imagine themselves as Jack/David/Sophie/Ender for a second, then click and find out the company anyway.

The Results

As of this moment, there are 22 jobs posted on the board.  I’m scoring them as follows:

List only your company and the title of the job you’re hiring for: 0 points

Do anything else at all: 1 point

Total score: 7/22

 

 

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Paul Graham may be right, but Chris Zacharias is righter

Posted: December 23rd, 2012 | Author: | Filed under: Startups | 30 Comments »

Chris Zacharias, founder of imgix.com (and Y Combinator grad), recently wrote an interesting blog post that postulated a different funding strategy.  Instead of pricing his round at market, he priced it significantly below.  He claims this gave him access to a group of high-quality “value-conscious” angel investors who would not invest in Y Combinator companies at the higher valuations that were normal for the market.

Paul Graham, founder of YC, challenged Chris on two points.  First, he claimed that it wasn’t rational for angel investors to be price-sensitive.  Second, he said that Chris’s evidence was just an anecdote – he may have found good investors at a lower price point, but that didn’t mean that less price-sensitive investors weren’t equally valuable.

I think Paul may be correct, but he misses Chris’s genius.  I believe what Chris is doing is an example of one of my favorite startup strategies, the contrarian segmentation.

Imagine a set of investors who have decided to only invest in companies that will accept the investment in Dutch guilders. This strange circumstance is found randomly throughout a significant minority of the investing populace, and isn’t well correlated with any other investor traits.

Most companies say, “This is silly! There are meaningful downsides to taking investment in guilders. I will only consider investors who take American dollars.”

But one canny startup decides to take the contrarian approach: they actively look for guilder-investing angels. They pay some additional cost for doing so (in guilder-conversion fees and so on). However, there is no competition in this investment pool. They complete their investment round far more quickly than their dollar-seeking bretheren, and get the very best of the guilder-investing angels in their round.

Paul may be right that “there is no value-investing in startups” – that is, Chris’s investors are making a mistake.  He may be right that non-price-conscious investors are equally or more valuable than price conscious ones.  But even so, Chris is doing something very smart: he’s fishing in a smaller pool.  There may be fewer fish, but he’s got them all to himself.

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Trust me: don’t tell me what you’re doing.

Posted: November 25th, 2012 | Author: | Filed under: Startups | 6 Comments »

There’s a startup in Seattle I’ve been tracking for a while. They’re a part of Techstars (where I serve as a mentor) so that’s not particularly unusual. But I’ve been keeping a particularly close eye because they’re working in a product area that overlaps with my responsibilities at my day job.

Because of the potential competitive conflict, I avoided them throughout the Techstars program.  That wasn’t a big deal – mentors are encouraged to focus on a few companies, so I just picked other ones.  They approached me and I let them know that I didn’t want to know what they were working on until it was public information.

Now, I’m usually on the “don’t sweat confidentiality” bandwagon.  In fact, I’m generally the guy in the front of that bandwagon in the big fuzzy hat with a baton.  But this was a little different.

Instead of explaining it in the third person, let me excerpt the emails.

Their email:

So fun to see you yesterday at Demo Day. I’m probably naive, but I trust you and I trust that there are more than enough consumer pain points to “go around” in the auto space. Accordingly, I’m an open book, I’m happy to talk any time, and I’d love to get together for lunch whenever works for you.   :)

My reply:

Let me be direct: “trust” means that you believe someone.  So believe me when I say that if you give me a good idea, I am obligated by my responsibilities to my employer to make use of it.  In my case, being trustworthy means being completely transparent that I’m running a business that has overlapping opportunities, I have an obligation to run that business in the best way I can, and some aspect of that business may be a zero-sum game with yours.

I still want to help these guys.  Heck, maybe their company can create tons of value and I can buy it someday and give them a great exit.  But right now is not the time for them to be spilling secrets to me.

They’re mostly thinking about this the right way.  Startups rarely get killed by direct competition.  Ideas getting stolen are the exception, rather than the norm.  But when someone not only has means, motive, and opportunity but actually tells you their full intent… then it’s probably time to play it coy.

Look, I’m paranoid about conflicts of interest. Perhaps I’m an unusual case.  But remember: trusting someone isn’t enough.  Even if they are trustworthy, their obligations may not be to you.

 

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This is why I’m not backing you on Kickstarter

Posted: November 16th, 2012 | Author: | Filed under: Startups | 19 Comments »

I want to buy some clothes.  From From Holden (not a typo).  And I can’t.  Because they’re full of Kickstoppers.

More and more, I’m seeing exciting, fun projects on Kickstarter that make me think they’re being run by the cast of Community.  Clever, well meaning, adorable, and more clueless than a general with a gmail account.

In case you just landed from Planet Preorder, Kickstarter is a site where you can “back” projects and get “rewards” in return.  For most of the civilized world, it’s a way to preorder stuff from teams that haven’t figured out how to make it yet.

I’ve backed a few projects before: Romo the Robot (in front of me), Stack Soap (in my shower), LadyCoders (in progress), DIY Spectroscopy Kit (in the mail), and Pebble (in schedule la-la land).  They’ve turned out with varying degrees of success, and that’s OK – part of Kickstarter is that you’re taking a bet on a team to make something amazing happen.

But more and more I’ve been seeing the same set of mistakes that just leaves me sighing wearily, hitting the back button, instead of kicking start.

Because examples are precious, I’m going to pick on the good folks from From Holden*.  I’m choosing them because a) they’re an egregious example of all three Kickstarter sins, and b) they’ve already raised 6x their target as of this writing, so I’m not going to stifle what appears to be a very well intentioned team that seems to have a great product offering.

Kickstopper 1: Dodging Details

Are these shirts machine washable?

Are the T-shirts cut for your founder? Because my abdomen does not look like his.

“You built a venture backed firm that reached 275 million people monthly” – Who?

I realize that you want to sell a crap-ton of T-shirts.  And I know the answers to these questions may not endear you to everyone.  That’s OK.  As a startup, polarizing decisions are a virtue. If you’re selling dryclean-only T-shirts cut for Arnold Schwarzenegger, own it!  You’ll get fewer returns and your target market will love you to bits.  A dear friend of mine (who may choose to identify himself in the comments?) was effusing, without irony, about how much he loved a pair of jeans that is completely unwashable but, instead, must be frozen and thawed.  If they found buyers, so will you.

But when you don’t address issues like these proactively, when you’re answer to “How do I know it will fit” is “Well if it doesn’t send it back”, it makes me think you’re more concerned with having lots of customers than having happy customers.

Kickstopper 2: Not Totally Thinking This Through

“We’ve had dozens of people ask us – ‘what’s next?’, ‘Do we have any reach goals?’ …. well, we spent all night thinking about it and here is what we came up with.”

Maybe you said this solely for the purposes of dramatic illustration, but let me take you at your word.  It is terrifying to me that you are now accepting real cash money for a product that you conceived of less than 24 hours ago.  I’m not entirely sure what a beanie is (this?) but presumably it hasn’t received the same care and diligence for sourcing, design, and so on as everything else you’re offering.  Or even worse, it has.

Kickstopper 3: Bull****ting About Risk

Quite recently, Kickstarter added a section called “Risks and Challenges”. They did this so you could reassure your customers that you don’t have any risks, and that there are no possible challenges to deliver your product.

Or at least that’s what I surmise from reading your section on risks and challenges.  You spend the whole (short) section talking about how awesome you are, then quite literally say that all you need is fabric.

Pro tip: if I, who know your business as well as I know the feeding habits of the Springbok Antelope, can come up with more risks than you can, you’re not doing it right.

Kick this nonsense to the curb

Come on, Kickstarters.  It’s OK.  We know  you’re excited.  We know you’re new to this.  We want to see you succeed. We don’t expect perfection.

We can forgive a lot, as long as you’re being straight with us.

*Update

From Holden has clearly mastered the rare and precious skill of listening to customers.  They’ve overhauled their Kickstarter page, and have gone from being the worst-case example to best-case.  I just backed them, because they’ve demonstrated a lot of planning about how to mitigate risk smartly. Bravo guys.

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Livesheeting Techstars Demo Day

Posted: November 1st, 2012 | Author: | Filed under: Startups | 1 Comment »

Much as I did before, I’m running a live, world-writable spreadsheet of my notes on the pitches from Techstars demo day 2012. Things are just getting started as I write this now and the lineup of companies looks strong. You can follow along in realtime (questions & comments very welcome!) at:

https://docs.google.com/a/danshapiro.com/spreadsheet/ccc?key=0AjzJCzHMUai-dHBaU0VaMFBJc3lpYXJISFVBWEZnLVE&pli=1#gid=0

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What you probably don’t know about NDAs

Posted: October 22nd, 2012 | Author: | Filed under: Startups | 9 Comments »

This blog post was originally published in Xconomy, after which I promptly forgot about it and left it to languish in my drafts folder until today.

There is no love like a first time entrepreneur’s love with nondisclosure agreements.  They are a romantic dream: secret pacts bonding two economic entities together as one, if only for the transaction.  Promises of futures together and sweet nothings exchanged.  The Humbled MBA nailed it – newpreneurs love NDAs.

Now let’s talk reality.  First…

NDAs don’t stop leaks.

Theoretically, a nondisclosure agreement commits the signing parties to… well, not disclose stuff.  Practically, it gives you theoretical standing to prevail in a lawsuit where you sue someone for disclosing your secrets.

But that’s a giant stinking load of donkey dung.  It’s almost never going to happen that you actually sue someone for disclosing a secret and prevail.  It’s just too hard, too complicated, and frankly too easy to lie your way out of getting caught.  How are they going to prove they didn’t just think of the idea themselves, or hear it from a different, third party that wasn’t covered by an NDA?  Remember that if you have 99 people sign an NDA and 1 person doesn’t, that person can publish your idea in the Wall Street Journal – and to add insult to injury, when they do, the other NDAs all become invalid since they only apply to confidential information.

NDAs: terrorist threats

So forget winning lawsuits.  What about threatening lawsuits?  Well, you can threaten a lawsuit for any reason, and you can generally file lawsuits for almost any reason.  But having an NDA with someone is a very good way to make that threat more annoying.  You can file a suit that you have no  intention of consummating, and if there’s an NDA in place, they will be forced to take it more seriously – and that’s a pain in the rear.  NDAs are a force multiplier in legal blustering.  If you like legal blustering, get lots of people to sign NDAs.  It’ll make your sound and fury signify a bit more than nothing.

If you’re not the legal threatening type, there’s still some value to an NDA.  They don’t know that you’re not a crazy legal Quixote, so they might think twice before leaking.  Maybe.  But I find deceptive folk make a habit of being deceptive, and honorable folk respect these things with or without paperwork, so I don’t see a terribly great amount of benefit to it.

When NDAs get signed

There’s one and only one reason that NDAs get signed: when one side or both have a great deal of leverage in the negotiation.  You see, whichever side makes a commitment not to disclose is basically opening themselves to NDA terrorism.   Usually NDAs are exchanged before real value trades hands.  Why would someone take on that significant liability for no benefit?  Generally, because the other side has something they want.  Let me give some examples.

Company talking to a potential service provider, contractor, or employee

Someone approaches your startup and wants you to pay them money.  You think you can best evaluate their capabilities by sharing Secret Sauce with them, so ask them to sign an NDA.  They almost certainly will.  That’s because you have the money, and with money comes leverage.

Company talking to an investor

Fundraising time!  You go talk to an investor, and ask them to sign an NDA.  What’s wrong with this picture?

Well, the investor will give you a story about how they hear lots of ideas over and over again, and most ideas aren’t original, so while you might think they misappropriated your great idea they really just came across it separately.  And they might resort to platitudes, saying “VCs don’t do that” (which is true, but not a very good argument).

But the bottom line is that they have the money and you don’t.  You have no leverage to get them to sign.

Of course, there are always exceptions.  If someone of sufficient stature showed up in a VC office and said they had to sign an NDA with a first-born assignment rider in order to look at their pitch deck, they’d be fighting over the pen.  It’s all about the leverage.

Two companies talking

You can guess how this works:

  • Startup signs Microsoft’s NDA
  • Two startups dicker a bit before agreeing on a mutual NDA, or decide to save energy and skip it
  • Microsoft and Intel negotiate a master NDA for nine months, and can’t start any individual project without spending three months building out an addendum to cover the specifics of that project.

It’s all about the leverage.

NDAs: the sign-ee’s view

If someone asks me to sign an NDA, I have to assume they fall in to one of three categories.

1.       They’re a legal terrorist and see great value to getting me to sign it, so they can abuse me later with frivolous lawsuits if they think I leaked something.

2.       They have leverage, and know that they can probably get me to sign it.

3.       They’re inexperienced, and don’t realize that absent 1 or 2, it’s probably not worth asking.

#2 is pretty easy to spot, because I’m asking them for money or we’re negotiating a major business agreement.  If that’s not the case, then I figure I’m dealing with a terrorist or a novice, and either way I’m going to decline and have second thoughts about working with them.

A special note for visitors to Google and RealNetworks’ campuses

Google wants you to sign an NDA before they let you in, but they do have the courtesy to offer a “decline to sign” button.   I always click it and get a funny look from the receptionist, and then nobody else cares.  The line I have prepared (just in case) is: “If we need an NDA to have this conversation, please send it over and I’ll have counsel look at it.”

Real wants you to sign an NDA before they let you pee.  This is not a dramatic hyperbole to emphasize their vigor in pursuing your signature; it’s the literal truth.  Go in to the front desk of their Seattle office and just try to get to the bathroom without signing an NDA.  I pulled it off, but it required three security staff, one of whom had to escort me to the men’s room.   Fortunately for all involved they opted to stay outside.

In summary, then:

1.       If someone is asking you for money, make them sign an NDA.  It will make them slightly more scared of leaking information.

2.       If you are asking someone for money, don’t ask them to sign an NDA.  You will come off looking like an ignoramus or a terrorist.

3.       If you’re doing real business with a company, you will probably sign an NDA.  If one company’s bigger, you’ll use theirs.

Happy non-disclosing!

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