Latest Entries

Prospects for Google = Gloomy?

If you believe the executives at Google the future for Google is not so hot.  Over the past 18 months some of the richest people in the world, who also happen to work at Google, have decided that the stock is overvalued.  Not a single insider has bought a single share of Google stock in the past 18 months.  Instead those same insiders have sold $7.4 billion in google stock.

If you have taken $2 billion off of the table (for diversification purposes of course) I think it is time to take a stand.  If you are willing to tell shareholders your stock is worth at least what it is selling for I would stop selling.  If you are willing to tell shareholders your stock is going to be workth more than it is selling for I would start buying.

The Google guys have taken  $7.4 billion off the table.  When should they start doubling down?

  • Larry Page: $2 billion
  • Sergey Brin: $1.9 billion
  • Omid Kordestani: $1.1 billion
  • Eric Schmidt: $650 million
  • Ram Shriram: $650 million (Director, Investor)
  • David Drummond: $200 million
  • George Reyes: $200 million
  • Jonathan Rosenberg: $200 million



Attracting Private Investors

Much of the investment discussion has been focused on institutional investors and their attitudes toward investment in entrepreneurial concerns.  On the one hand, this provides some context for you as to how the “professionals” address such investments.

But on the other, the vast majority of companies are funded by private investors.  In a “normal” year, venture capital will invest in 2,000-3,000 companies in the United States.  Of those, about half will be receiving their first round of institutional investment.  This is in contrast with the total of about 14 million businesses in the United States of which well over 13 million have less than 100 employees.  Every year, close to one million new businesses are launched. It has been estimated that private investors provide ten times the capital for small businesses as compared to that invested by institutional venture capital.

The bottom line for most of the entrepreneurial readers is that your funding is much more likely to come from private sources than from institutional venture capital.  For the next few weeks, I will focus on the private investor.

Not all the same
Private investors are not all the same.  Quite often a first-time entrepreneur gets focused on raising money from an “investor.” This “investor” becomes the sole focus of the entrepreneur as he seeks the “answer” to how to access and successfully solicit funding from that “investor.”  If only it were that simple.

The private investor is as varied as your neighbors, as your classmates in the various schools you attended, as the drivers in all the cars fighting the traffic with you each day.  Private investors are individuals first and foremost, with the same human differences that each of us has.

As such, some may have an interest in your company and some won’t.  Some you’ll want to be interested in your business and others you’ll want to avoid.  Some will have investment expectations that you consider to be reasonable, and some won’t.  Your challenge will be to identify the intersection of potential investors in your company out of the universe of all investors with the deal structures that that are acceptable to you out of the universe of potential deal structures.

The Role of PERCEIVED Risk
The first thing you need to understand as you consider approaching potential investors is that their perception of the risk involved with your business (and their potential to receive a return) is the initial hurdle you must overcome.  Their perception of risk is likely to be much different than yours.  You need to be sensitive to that and responsive to that.

A corollary to this is that this screen if pretty much binary.  By that I mean the potential private investor will have an initial reaction to you, your company, and the investment opportunity. If that initial reaction is one of, “it’s too risky,” you can scratch that person off your potential investor list.

Only if you pass this screen will you have an opportunity to try to convince the individual to invest and to influence the terms under which such an investment would occur.

As you proceed down the path of seeking private investment, the potential investor will be making a series of decisions. The outcome of each decision will be “no,” or “maybe.” Your goal is to get, “maybe,” each time until you finally get the coveted, “YES!”

Advice to Entrepreneurs

  • In all probability, your funding is going to come from private investors, not institutional venture capital.
  • There is no single “private investor.” Each is an individual with his or her own views and sensitivities.  Attracting an investment from such sources is not a “one size fits all” proposition.
  • The potential investor’s perception of risk will greatly influence whether he has an interest in investing in your company under any circumstances.
  • If you approach a potential investor prematurely or inappropriately, you will lose that investor unnecessarily and for the wrong reasons.
  • Surround yourself with professionals, mentors, and advisors who can help you level the playing field.

Next time we’ll look at how these issues affect private investors and how you can use this knowledge to improve your chances of successfully raising the desired capital.


By Frank Demmler adjunct professor of entrepreneurship at Carnegie Mellon


Bankruptcy Blog Pointer

Brad Feld points out that Cooley Godward has a new blog called The Business Bankruptcy Blog.  Chapter 11 is never fun as I can attest, but a good resource for information is always helpful.


Startup Valuation

This post covers entrepreneurial fund raising. Let’s review some of what we’ve discussed in recent weeks.

Review of Valuation

Angels of Brooklands cemeteryIn past articles, I explained that valuation was a number agreed to by the parties involved in a transaction. While quantitative tools are used to estimate, or justify, a range of values, the actual value used in the deal is determined much more subjectively than a first-time entrepreneur would like to believe.

As a starting point, I noted that valuation could be represented by the following equation:

Pre-financing value + investment = post-financing value.

Further, I cautioned that valuation was just one of many elements of an investment, and that it needed to be put in the context of the total deal. In particular, I said that the terms of preferred stock were material.

Review of preferred stock

Preferred stock is called preferred for a reason. It provides the investor with certain preferences, some of which directly affect the value of his investment under different circumstances.

Features of Preferred Stock

Preferred stock is materially different than common stock in many important respects. Some of the terms and characteristics of preferred stock can have significant consequences.

In the world of private equity, the definition of liquidation encompasses most transactions, other than an initial public offering (IPO), through which the investor seeks to “liquidate” his investment.

Liquidation Preference
One of the key features of preferred stock is that higher in the pecking order of who gets paid what and when in the event of a liquidation. Preferred stock shareholders receive distributions from liquidation before common stock shareholders.

Liquidation Amount
This is the amount of money the investor in preferred stock has a right to receive before the common stock shareholders receive anything. The dollar amount is defined in the term sheet. It often starts with the investment amount plus accrued, but unpaid dividends. Then some sort of multiplier is usually applied to that amount.

Originally, preferred stock was an ‘either-or’ proposition for the investor in the event of liquidation. The investor would calculate the liquidation amount, calculate the value of the common stock if converted, and pick the one that yielded the higher amount. This is called non-participating preferred stock.

The key feature of participating preferred is that the investor gets the liquidation amount first, AND then participates in the distributions on an as-converted basis.

Anti-dilution protection
If the company sells shares at some future date at a share price less than what the investor paid, the investor wants anti-dilution protection, either full-ratchet or weighted-average.

To a large degree, control and percentage of ownership become separate issues in deals including preferred stock.

How preferred stock terms can affect valuation – a scenario

Let’s take a look at how all of this can play out.

The Original Investment
Let’s say an investor invests $1 million in your company at a pre-financing value of $1 million [50-50 ownership]. Let’s also say that the investment purchases Participating Convertible Preferred Stock with a 10% dividend rate and a liquidation amount multiple of two.

The Sale of The Company
Two years after he investment, the company has stalled for some reason, and it has never really gotten significant commercial traction and probably never will. An opportunity comes up for the company to be acquired for $5 million. While not a home run, everyone should be relatively happy. Right? Maybe not.

The Distribution of the Proceeds
After two years, the preferred stock purchase price plus accrued dividends has grown to $1.2 million. After applying the multiplier of two, the liquidation amount is $2.4 million, which the investor gets “off the top.” The remaining $2.6 million is divided pro rata with the as-converted shareholdings, or 50-50, meaning $1.3 million each. The investor has received $3.7 million and you get $1.3 million. Under these circumstances, what appeared to be a 50-50 deal at the outset became a 75-25 deal!

Advice to Entrepreneurs

  • Valuation is only meaningful in the context of the complete deal.
  • Preferred stock provides the investor with extra benefits and rights as compared to the common stock shareholders.
  • Understanding the arithmetic of deals is very important.
  • Surround yourself with professionals, mentors, and advisors who can help you level the playing field.

Next time we’ll begin to look at the role of angel investors and how you can attract them.


By Frank Demmler adjunct professor of entrepreneurship at Carnegie Mellon


Business Plan Archive

I found (it came out in 2002, where have I been?) a site called the Business Plan Archive sponsored by the Library of Congress.  If you have ever written a business plan you will understand why this site is so important.  Here is how they describe the archive:

Welcome to the Business Plan Archive.  In partnership with the Library of Congress, the Center for History and New Media, and the University of Maryland Libraries, the Archive collects and preserves business plans and related planning documents from the Birth of the Dot Com Era so that future generations will be able to learn from this remarkable episode in the history of technology and entrepreneurship.

The site includes actual business plans, executive summaries, powerpoints and press releases.  I am considering adding LayerOne’s stuff to the archive.

[via Pukraj]


hResume Creator Online

For those of you who want to create an hResume we built a creator. Check out the beta version here: hResume Creator. You simply enter your resume data, cut and then paste the code on your website. Give us the URL so we can ping it. We built the Creator for folks who don’t have a WordPress blog. Previously we released the hResume WordPress plugin.

What is hResume? hResume is a microformat for publishing resumes and CVs. For those of you who are wondering what Microformats are I will steal from the Microformats site:

Designed for humans first and machines second, microformats are a set of simple, open data formats built upon existing and widely adopted standards. Instead of throwing away what works today, microformats intend to solve simpler problems first by adapting to current behaviors and usage patterns (e.g. XHTML, blogging).

The hResume project is a little idea I had that we talked about in a series of posts (ongoing) titled Napkin to Startup.


Burning Man Anyone?

Burning Man 2006 is between 8/28-9/4 this year.  Are you coming?  What is burning man?

Trying to explain what Burning Man is to someone who has never been to the event is a bit like trying to explain what a particular color looks like to someone who is blind. In this section you will find the peripheral definitions of what the event is as a whole, but to truly understand this event, one must participate. This site serves to try to paint a picture of the Burning Man experience to those who are new to the project, as well as to give those participants looking to keep the fire burning in their daily lives an environment in which to connect to their fellow community members. For a brief yet eloquent overview of the entire event from the time of arrival to the time of exodus, please read “What is Burning Man?“, an essay written by participant and one-time web team member, Molly Steenson. Please see archived sections for each year to read more about the art themes, art installations and theme camps for each year.

Signup on Upcoming here.


Texas based eSports Partners Raises $5MM

According to Todd Anders from GuideCap, Coppell based eSports Partners raised a $5,000,000 senior credit facility from Compass Bank (GuideCap arranged the financing).  Never heard of eSports?  Todd explained, “The company is very low profile and wants to keep it that way.”
Run by CEO Michael McKay, eSports is a merchandise service provider offering solutions for NFL and collegiate markets.  The company reported revenues of $31.5MM with 250 employees.
Their solutions include ecommerce (site design, content development and management), retail consulting (store locations, build out, merchandising and management), game day operations (venues to sell team merchandise), catalogs (creation and order fullfullment) and several other related services.

eSports’ clients (gathered from a quick Google search) include the San Diego Chargers, Washington Redskins, University of Arkansas Razorbacks, Miami Doplhins, University of Tennessee, Miami Hurricanes, Denver Broncos, Dallas Cowboys, New York Giants, Detroit Lions, Tennessee Titans, Indianpolis Colts, Arizona Cardinals and Texas A&M University.


VC on the chopping block: Crescendo

I met with David Spreng back in the salad days when I was raising money.  He turned me down (see, not all his decisions were bad).  The Mercury News has a VERY hard hitting piece on Crescendo.  Why?

Investors, known as limited partners, are pumping in huge amounts of money into venture firms again, but are finally parsing out the ones who don’t deserve it.

Looks like Crescendo has two strikes and if you ask Matt Marshall it should be shut down.  This is news because traditionally everyone loved to beat up on the companies who failed, but the VCs seemed to get a pass.  Now the VCs are being held responsible for their investments.  Interesting idea.


Lazy web: I need a quick and easy way to send money internationally!

I need your help.  We do business in six different countries and need to send money to our people in those markets.  Today we wire funds to our people in those markets.  Not only are wires expensive they are fairly unreliable, often being refused or even worse held in limbo for days if not weeks.

I need a product that will allow me to inexpensively pay our people around the world.  PayPal is not an option in much of the world.  Also, Western Union’s own Quick Cash product is perfect, but they have a minimum of 100 transactions per month - I will only have 20.  Any ideas?  Suggestions?

Oh and on another note, I wish Chase (we are a customer) was blogging about their business products or perhaps had a wiki, oh my!  Chase advertises that they offer a product called Quick Cash that allows our people to arrive at any Western Union office and claim their money.  It is fairly inexpensive ($12 per transaction) and is very flexible (all of my people like Western Union).  Trouble is I can’t get anyone at Chase to help me purchase the product (they don’t have training on it).  Anyway, any help would be appreciated!


Jeff Clavier - The Web 2.0 VC!

Earlier this summer, during the World Cup, I had the chance to spend some time with Jeff Clavier.  He invited us to his home to talk about Big in Japan and our hope was to get to know him better.
He was super busy (four offering memorandums were sitting on his kitchen table waiting to be signed and mailed out), but he took some time hang out with us.  I wondered how he was able to do so much and today’s news that one of his companies, Userplane was aquired by AOL, has me really stumped.

Earlier this year AOL bought Truveo (another company he advises) and now only eight months later they are buying another one!  Wow!  Not to mention that Netvibes, another one of his companies, just raised $15MM from Index and Accel.  Om Malik has dubbed him, “THE WEB 2.0 VC” - it is starting to look that way!  Congratuations Jeff!


Scarcity or Abundance?

The Power of IntentionThis morning my wife was telling me about a book she is reading called “The Power of Intention.” She was explaining how the book described that many people have a scarcity-driven world view. The idea that there just isn’t enough to go around, i.e. the world is zero sum.

Many of our ancesters here in the U.S. just didn’t accept the idea that scarcity had to rule their lives, instead they decided that they could live lives of abundance. The old world view was that the pie was finite, the new world view was that the pie could get bigger or was infinite (and I am not talking about zero-point energy).
For me this has been proven through our experience with open source software. Architel needed a trouble ticket system to run it’s business. We didn’t want to spend $50,000 to $100,000 on a boxed solution that would require a yearly investment of $10,000 to $30,000 per year for software licensing and support. Instead we decided to build a software program specifically tailored to meet Architel’s needs. If we had a scarcity-driven view of the world we would have locked the software up on our servers and used it to competitive advantage. Instead, viewing the world from abundance, we released the software to anyone interested enough to download it. Over 100 people/companies per day downloaded the software over the course of six months. Since then hundreds of companies have requested that we customize it, host it or manage it for them resulting in a completely new line of business we call SimpleTicket.

Since many people and much of the world lives in a zero sum world of scarcity it is important to realize how they play. The most popular method of play is called minimax, i.e. the idea that one should minimize the maximum possible loss. (remember War Games?) Wikipedia explains better than I can:

\sup_\theta R(\theta,\tilde{\delta}) = \inf_\delta \sup_\theta R(\theta,\delta)A simple version of the algorithm deals with games such as tic-tac-toe, where each player can win, lose, or draw. If player A can win in one move, his best move is that winning move. If player B knows that one move will lead to the situation where player A can win in one move, while another move will lead to the situation where player A can, at best, draw, then player B’s best move is the one leading to a draw. Late in the game, it’s easy to see what the “best” move is. The Minimax algorithm helps find the best move, by working backwards from the end of the game. At each step it assumes that player A is trying to maximize the chances of A winning when he plays, while on the next turn player B is trying to minimize the chances of A winning (i.e., to maximize B’s own chances of winning).

Minimax doesn’t even allow for the concept that two people could win.  If you don’t have a framework to allow for abundance you will continue to “work backward” from the result you assume most likely.  Isn’t this crazy?  Win, lose or draw?  Thats it?  I don’t think so.  If you were to take a look at my office library you would find more than 20 titles on game theory. Only one of them even comes close to explaining why abundance works - it is called the Bible (John 6:5-15)…


Telstar Logistics Profile

Telstar isn’t located in Texas and it isn’t really a company.  Instead it is the cover for Todd Lappin’s car.  How did I hear about Telstar and Todd?  First I saw Todd’s picture in Business 2.0 and then I ran across his living room on Flickr (we have some friends in common).  Check out the art on his wall:

I dug a little deeper (because I want one for my office) and uncovered a very interesting story.  I will simply reprint Todd’s explaination of Telstar here:

What is Telstar Logistics?

The short answer is that it’s a scam for parking illegally in loading zones. The nerdy answer is that it’s an ongoing experiment in corporate phenomenology, urban camouflage, and identity development. The tale unfolds something like this:

In the late 1980s, I lived in Providence, Rhode Island, where I drove a 1974 Dodge Tradesman 200 van. One day, I had an epiphany — if I disguised the van to look like a work vehicle, I’d be able to park in yellow-curb zones without getting parking tickets. After a trip to an art-supply store to buy some vinyl lettering, an ambiguous company name was created, the letters were applied to the sides of the van, and indeed, no tickets were received.

The fake company took on a life of its own. In 1987, I bought a new SUV, which was duly accessorized to look like a fleet vehicle, with yellow stripes on the tailgate, a cryptic vehicle number on the sides, and a police-style spotlight.

This vehicle served me well throughout the 1990s, and I’m pretty confident that the commercial camouflage did much to help deter theft and vandalism while parked on the gritty streets of San Francisco’s Mission District.

Gradually, Telstar Logstics evolved. In 1999, I appropriated a logo from a defunct 1950s-era nuclear energy mutual fund, and applied that to the sides of yet another new vehicle.

I ordered hundreds of smaller Telstar Logistics stickers, and bought some custom-embroidered Telstar Logistics t-shirts for myself and a few friends. I started to give away Telstar Logistics pens as holiday gifts.

So, in other words, Telstar Logistics is my branded alter ego. Practically, however, it provides useful cover for many of the things I like to do, such as exploring transportation facilities and abandoned military bases.


Silicon Valley’s Valleywag has hailed Telstar Logistics as “the most fundable company in the Valley.” Business 2.0 magazine calls it “an amusing sideline.” Boing Boing says “Telstar Logistics is the only firm I trust for my supply chain needs.” Warren Buffett could not be reached for comment.

And what is “Telstar?” For a brief history of that, click here.


What’s so preferable about preferred stock?

Once upon a time an aspiring small businessperson needed some money to start his business. Through a circuitous route he found himself in front of the owner of some capital.

After explaining his plight, the small businessperson asked the capitalist for a loan. The capitalist replied, “While I find your concept intriguing, there is too much risk associated with it and I couldn’t possibly lend you the money. If I were to assume this much risk, I would need an equity stake that I could sell in the future.”

“Well, I would consider selling you some common stock,” responded the aspirant.

“That’s fine for you, but I need some additional consideration, some kind of preference, in the event you hit less than a home run,” observed the moneyman. “After all, I am trying to achieve an appropriate return on my investment, while you are an enterprising young man, an entrepreneur, if I might coin a phrase, trying to change the world.”

“You, sir, are a predatory vulture,” yelped the youngster.

“I prefer to think of it as being venturesome,” countered the investor. “If you want my money, I need to get preferred stock.”

And thus the lexicon of early stage business added “entrepreneur,” “venture capital,” and “preferred stock” to its dictionary.

Overview of preferred stock

The preceding fiction notwithstanding, preferred stock is the coin of the realm of virtually all institutional, and many private, investors. It is materially different than common stock in many important respects. Some of the terms and characteristics of preferred stock have important characteristics.


The conventional definition of liquidation evokes images of “going out of business” signs and sales at heavy discounts. In the industrial world, one thinks of Chapter 7 bankruptcy. In the world of private equity, the definition is expanded to take in virtually any transaction that is agreed to that is less than the proverbial home run. It is tantamount to the investor throwing in the towel on achieving the originally conceived exit, and seeking to “liquidate” his investment.

One of the key features of preferred stock is that higher in the pecking order of who gets paid what and when in the event of a liquidation. Payroll and secured creditors, among others, have first rights to the proceeds of liquidation. Preferred stock holders come next, followed by common stock holders.

Liquidation Preference (or Amount)

This is the amount of money the investor in preferred stock has a right to before the common stock shareholders receive any money in liquidation. It is usually phrased in the term sheet something like, “The Preferred Stock Shareholders shall receive all proceeds from the liquidation until they have received 100% of their liquidation preference.”

The dollar amount is defined in the term sheet. It often starts with the investment amount plus accrued, but unpaid dividends (often in the range of 6-10%). Then, depending upon financial market conditions and the types of deals that are being done at the time, some sort of adjustment multiple is defined and applied. These multiples can be:

  • a single number (1.25 – 2.00 in today’s [circa March 2004] market)
  • a time-based increment (1.25, increasing by .25 on each anniversary)
  • tied to some threshold event (2.00 until the second anniversary, 3.00 thereafter)
  • tied to the dollar amount of the liquidation (some formula if the proceeds are less than some amount, and a different formula above that amount)


When preferred stock was originally created (see opening paragraph), it was intended to address the differences between the entrepreneur and the financial investor. In essence, if the financial out come was less than had been anticipate, the investor postured that he wanted the opportunity to some minimum return. What resulted was the creation of simple Convertible Preferred Stock.

Simple Convertible Preferred Stock

In its infancy, preferred stock was an either-or proposition for the investor. Calculate the liquidation preference, calculate the value of the common stock if converted, and pick the one that is to the investor’s greater benefit.

The logic is straightforward and the justification appears to be reasonable.

Participating Convertible Preferred Stock

After a period of time, someone came up with the idea of Participating Convertible Preferred Stock. Its key feature was that the investor got the liquidation preference first, AND then participated in the distributions on an as-converted basis. The investors justify this on the basis of locking in as a good a return as possible in a less-than-desirable outcome. Entrepreneurs often take umbrage at this and consider it to be double dipping.

This is a prime example of the Golden Rule: He who has the gold rules. Without negotiating leverage, if the investor seeks participating preferred, then that’s likely to be part of their investment style, and it’s unlikely that they will be willing to negotiate this feature.

Anti-dilution protection

If the company sells shares at some future date at a share price less than what the investor paid, the investor wants anti-dilution protection.

Full-ratchet anti-dilution protection

The harshest form of protection from the entrepreneur’s perspective is full-ratchet. It says that the investor gets rights to that number of shares as if he had paid the lower price. If he paid $2.00 per share, and subsequent shares were sold for $1.00, his number of shares would double to compensate for this transaction.

Weighted-average anti-dilution protection

Weighted-average is less painful. It takes the share base of the company into consideration, they reducing the overall impact. For those of you who are interested, I “borrowed” the following language from the documents one of the deals with which I was involved.

“Adjustment of Conversion Price Upon Issuance of Additional Shares of Common Stock. In the event that at any time or from time to time after the Original Issue Date for any series of Preferred Stock the Corporation shall issue Additional Shares of Common Stock (including, without limitation, Additional Shares of Common Stock deemed to be issued pursuant to Subsection 2(e)(iii)(1) but excluding Additional Shares of Common Stock deemed to be issued pursuant to Subsection 2(e)(iii)(2), which event is dealt with in Subsection 2(e)(vi)(1)), without consideration or for a consideration per share less than the Conversion Price of such series of Preferred Stock in effect on the date of and immediately prior to such issue, then and in such event, such Conversion Price of such series of Preferred Stock shall be reduced, concurrently with such issue, to a price (calculated to the nearest one tenth of one cent) determined in accordance with the following formula:

(P1) (Q1) + (P2) (Q2)

NCP = —‑‑‑‑‑‑‑‑‑‑‑‑‑———‑-

Q1 + Q2


NCP = New Series A Conversion Price or Series B Conversion Price, as applicable

P1 = Series A Conversion Price or Series B Conversion Price, as applicable, in effect immediately prior to new issue;

Q1 = Number of shares of Common Stock outstanding, or deemed to be outstanding as set forth below, immediately prior to such issue;

P2 = Weighted average price per share received by the Corporation upon such issue;

Q2 = Number of shares of Common Stock issued, or deemed to have been issued, in the subject transaction;

provided that for the purpose of this Subsection 2(e)(iv), all shares of Common Stock issuable upon conversion of shares of Preferred Stock outstanding immediately prior to such issue shall be deemed to be outstanding, and immediately after any Additional Shares of Common Stock are deemed issued pursuant to Subsection 2(e)(iii), such Additional Shares of Common Stock shall be deemed to be outstanding.”

Got that?


I often hear entrepreneurs say, “I won’t give up control,” or “I’m willing to consider any deal as long as I retain 51%.” For a plain, vanilla company, that makes sense and is meaningful. But a company that brings in sophisticated private equity is no longer “simple,” at least in a legal sense. To a large degree, control and percentage of ownership become separate issues. Let me cite two examples.

Protective provisions

One of the features of preferred stock will be a series of provisions that require that the preferred stock needs to approve before the company can do certain things. Let me rephrase that, regardless of how much equity the preferred stock shareholders own, they have veto power over certain company actions, typically including, but not limited to, liquidation, alteration of the preferred stock, issuance of any class of preferred stock superior to the existing preferred stock and restrictions on debt that the company can take on.

Board of Directors

Similarly, as part of the Preferred Stock transaction there will be agreement to the structure of the board and a Shareholders Agreement will be crafted whereby all shareholders have to vote for members of the board in the proscribed manner, regardless of relative equity positions.

Once a company goes down this path, the issue of “control” becomes complicated and not intuitively obvious, particularly to first-time entrepreneurs.

Advice to Entrepreneurs

  • If you’re going to play the game, you need to understand the rules.
  • Deals are complex. Ignorance is not a defense against unpleasant outcomes.
  • Do everything that you can to prevent the investor from invoking the Golden Rule.
  • Surround yourself with professionals, mentors, and advisors who can help you level the playing field.


By Frank Demmler adjunct professor of entrepreneurship at Carnegie Mellon


Mike’s newest blog: GearCrunch!

Need gear news?  Mike’s got your covered.  He hired John Biggs from Gizmodo and now he is in the game.  Mike explains how it will be different:

CrunchGear is going to be different from the other gadget blogs out there. The team is committed to writing about breaking news but will also be featuring weekly product comparisons in a given category. Expect CrunchGear to look like something between a pure blog and CNET Reviews. Our goal isn’t just to let you know about the hot new stuff coming out soon, but to also help you decide what kind of camera, laptop or MP3 player you want to buy as well.