Calling all bootstrappers for #DisruptSF campaign

Results from our founder-friendly term sheet twitter teardown.
Six attorneys compare popular investment agreements side-by-side to Founder Friendly Standard
Click each box in the interactive version for analysis.

To help entrepreneurs identify a founder-friendly term sheet, six attorneys compared KISS, Safe, NVCA, Gust, and other startup investment agreements to Founder Friendly Standard. The research took place in Q3 2019.

A startup that bootstraps and increases market power consistently has the best odds of getting a founder-friendly term sheet. You don’t need VC or angel investors to start your business.

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Why startup founders should have super-voting equity

Super-voting equity for founders in Section 1.1 of Founder Friendly Standard

Founder Friendly Standard gives founders 24:1 super-voting shares of stock. The purpose is to keep founders in control of their startups so they can build for the long term.

Here are data that support giving startup founders super-voting shares and thus control of their companies:

  1. Google has 10:1 super-voting equity for its founders. Snapchat doesn’t give shareholders any voting rights. Investors buy stock in these companies every day. 
  2. The Credit Suisse Family 1000 research found that companies controlled by their founders build for the long-term, which translates to a competitive advantage over time.
  3. Principal-agent theory suggests that agents (investors) may be more short-term focused than principals (founders).
  4. Prospect theory suggests that diversified investors would engage in riskier behavior to seek outsized gains. Founders, whose net worth is not diversified, would often prefer the opposite.
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Are there standard investment contract templates for investors and founders to use when funding startups?

Screenshot of a standard startup investment agreement

Yes, but founders should not trust them. A team of attorneys reviewed six popular term sheets in the infographic below. The attorneys revealed many investor agreements are not founder-friendly. Your first step should be to retain a laywer who represents entrepreneurs.

Screenshot of a standard startup investment agreement
Figure 1. Investment agreement template called “Founder Friendly Standard”

Ask your attorney about a startup investment contract template called Founder Friendly Standard. Founder Friendly Standard has 17 sections that can lay common disputes to rest such as who gets to vote, who gets liquidation preferences, what is the scope of non-compete, etc.

Here are (3) three of the juiciest sections:

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17 tweets from Grays Sports Almanac for Venture Capital

#StartupGrind 2019 was a coming out party for many of the ideas behind my investment hypothesis, Grays Sports Almanac for Venture Capital

Here are the top 17 tweets that illustrate points made in the book:

🤑 #startupgrind – solution to #VentureCapital liquidity problem = service providers to take a portion of their fees in warrants and swap 50% with a fund. The service providers would be earning client fees as their #diversified warrants appreciate. From my book, link in profile.

Originally tweeted by EISAIAH ENGEL (pronounced Isaiah) (@eisaiah_e) on February 12, 2019.

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What are the odds of startup success by US metro area?

1 in how many companies achieves High-Growth status by metro area. Washington DC leads the way with 1 in 326.

District of Columbia leads with 1 in 326 odds of starting a High-Growth Company. Providence is the city with the worst odds—1 in 3,297.

1 in how many companies achieves High-Growth status by metro area. Washington DC leads the way with 1 in 326.

A High-Growth Company is defined as achieving $2M+ in revenue with 20% annualized growth over a 3-year period. This definition comes from page 10 of the 2017 Kauffman Index of Growth Entrepreneurship.

The data table below shows the odds of starting a High-Growth Company in each major city in America. This data serves as a baseline for the ecosystem innovation fund model that I introduced in Innovation Casino. I am sharing my research notes here so that you can incorporate this data into your angel investing or venture capital models.

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Manage 10 of the 20 top startup failure risks.

Founder Friendly Standard and customer-funding can help founders avoid “No market need, Running out of cash, Not the right team,” and 7 more reasons startups fail. 

Source: Top 20 reasons startups fail is from CB Insights. I added the check marks.

The above graph shows the top 20 reasons why startups fail from CB Insights. I marked up the graph with green checkboxes to show which risk factors customer-funding (also called bootstrapping) can help you manage. Orange checkboxes denote risk factors that Founder Friendly Standard can help manage. 

Risk Factor: No market need

If you’re bootstrapping, you’ll find out pretty quickly if there is no market need. Unlike your angel and VC-funded cohorts, you’ll be able to make fast pivots while they’re lining up their organizations’ change management strategies.

Risk Factor: Ran out of cash

If you are bootstrapping, you are financing innovation with organic cash flows. This is a key growth driver in the Credit Suisse Family 1000 research. If your company is controlled by its founders, you’re more likely to pace yourself, spending the money like it’s your own vs. your VC-funded competitors who are quick to spend (principal–agent theory).

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My startup tips in one place

Here is a collection of tips for startup founders. I’ve learned these while starting three companies and transitioning into an employee of a Fortune 500 company. (All opinions are my own.)

Binge watch in Netflix style formatting.
There’s nothing like a good binge-watching session!

Amazon

Kindle Book: Grays Sports Almanac for Venture Capital (2018)

Audio Book: Grays Sports Almanac for Venture Capital (2018)

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Update: Founder Friendly Standard v1.1

Pictures of Founder Friendly Standard Authors
Pictures of Founder Friendly Standard Authors
Founder Friendly Standard Authors: Dan Flanegan, Eisaiah Engel, Adam Bloom

Founder Friendly Standard v1.0 has been updated today. The new version of the standard is 1.1. Here is a description of the change:

  • Section 2.4 – clarifying language (in bold) has been added for companies outside of the United States. The section now reads: Due to potentially devastating tax consequences, the company tells individuals receiving sweat equity in the United States to consult with a tax professional about making an election under Section 83(b) of the Internal Revenue Code. Founders who live or pay taxes outside the United States are similarly advised to consult tax professionals about applicable local and national taxes.

If you’re curious about how the Founder Friendly Standard came to be, check out the story of our terrible startup experiences in “I’ll be the Sean Parker to your Mark Zuckerberg.”

Grays Sports Almanac for Venture Capital

Grays Sports Almanac for Venture Capital - A new standard for optionality to beat the odds

A new standard for optionality to beat the odds

Grays Sports Almanac for Venture Capital proposes a new risk management strategy for venture capital. In this book, I outline why a venture fund might beat the odds by purchasing 2,208 to 4,416 warrants on startups. Startups would operate under a governance framework called the Founder Friendly Standard, which gives entrepreneurs control of their companies. In exchange, the venture fund would have the option to exercise warrants for 15 years—purchasing discounted equity only in the startups that become successful.

Book cover: Grays Sports Almanac for Venture Capital - A new standard for optionality to beat the odds

Introduction

In 2017, Forbes published an article called, “Group of White Men in Patagonia Vests Confused for VC Fund, Raise $500 Million.” It took a while for me to realize the article was satire. A year later, researchers from Harvard, IESE, and Yale unintentionally corroborated the Forbes story with the finding that luck and past success are the winning factors for startup investors—not skill (Nanda et al., 2018). Luck and past success can cause venture capitalists to become overconfident and tinker with their portfolio companies. This can be a problem for entrepreneurs and for limited partners (often pension funds and family offices) who trust venture capitalists to invest wisely.

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Fortune 500 board member tip for improving customer experience (CX): MAP IT OUT

map-customer-experience-journey

I own a single share in a handful of public companies. Each share gets me into the annual shareholder meeting where I can ask questions to Fortune 500 CFOs, CEOs, and board members. 2018 is my second year going to the meetings, and the strategy is effective at putting me in a room of  15 difficult-to-access people for 30 minutes. Anyone can follow this strategy. If you’re interested in replicating it, check out my portfolio here.

At last week’s shareholder meeting for a major consumer products company, I ran into a former CEO that once worked with a colleague of mine. This CEO was highly focused on the customer and led a Fortune 500 company through a significant growth period—all the way to an acquisition. Now, he’s on the board of several Fortune 500 companies. We’ll call him Mike.

My colleague and I planned a question for Mike about how to keep a company focused on the customer as you transition from an operator (CEO) to an advisor (board member).

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