June 2010 Archives

How-to learn about angel/vc term sheets

I think every startup entrepreneur (and angel investor) should have a good understanding of financing term sheets. Yes, even bootstrappers. I haven't raised any money for my companies that required a term sheet (just friends & family money in my first company), and yet I still think it is important for a number of reasons.

First, most companies will raise money at some point, and you don't want to be learning everything when you need to raise money because it will be distracting and you'll make mistakes that in hindsight seem stupid. Second, you never know exactly when you're going to be in a financing situation. Third, a lot of the same principles carry over into M&A term sheets, and even if you don't raise money I hope you may be involved in an acquisition at some point. And perhaps most importantly, fourth, it doesn't take very long.

I've written up the following directions to help you get there efficiently. Don't do it all in one sitting because you want your mind to digest the concepts over time. I suggest doing it over the course one week, setting aside a half an hour each day to go through this stuff.

Fortunately there are now a lot of great free, public resources to learn about financing term sheets. I would start by familiarizing yourself with some actual term sheets. For seed rounds, check out these (reading them slowly from top to bottom):
Now that you've seen what a term sheet looks like, go through each term and read the associated post in Brad Feld's Term Sheet series, a series of blog post where he explains each term. Some of these terms he covers are not in those docs, because they are more for venture rounds. You can skip those for now.

Once you feel you understand what the terms in the seed docs mean, read this Startup Company Lawyer post explaining how they differ from each other. Once you understand that, then you're ready to get a bit more complicated and look at more complete venture term sheets:
Launch the Term Sheet Generator, and open the NVCA doc. Now go through each term and go to the relevant section in the generator by accessing the select box at the top. Some of the terms will be familiar from before. The generator offers a lot of additional background/insight from the context of building a term sheet. Look for the links on the right entitled 'Click here to hide/show explanatory ntoes.' Also look for the market data links, e.g. liquidation preference.  And of course refer back to Brad's term sheet series for any posts you skipped before.

By now you should be familiar with pretty much every term and its place in the term sheet, and you're ready to digest some more advanced material. First check out this Startup Company Lawyer post on how the YC seed docs differ from traditional Series A docs and this Series Seed post on the same topic. Then check out these applicable Venture Hacks posts: Term Sheet Hacks, Option Pool Shuffle, Term sheet tune-up, & Terms that hurt. Finally, here are ome other posts that I think round out term sheet knowledge: The Challenge of The Ideal First Round Term Sheet (Brad Feld), Ideal first round funding terms & Don't shop your term sheet (Chris Dixon).

If you'd really like a book, I'd suggest the brief Term Sheets & Valuations, although I want to underscore that I don't think it is necessary. I purchased this book a number of years ago before I knew about any of the above (and most of it existed!). I found it useful then to get an intro into this stuff, and I just took it out and skimmed it and think it is still useful.

My experiences with ad.ly


ad.ly is a relatively new, well-funded startup that puts ads "in-stream" on twitter, and is supposedly expanding to Facebook, MySpace, etc. Such expansion may be wise in the wake of Twitter's TOS changes, but that's another story.

This story is about what happened when I tried to spend money on ad.ly. In a nutshell:

I tried to spend $130 three times. The first two campaigns (bottom) resulted in no spend. The third attempt resulted in $25 spent, i.e. about 20% of my intention.

So what's going on here? It's this:

Pretty much everyone I tried to advertise with Denied me. Except, they actually didn't. It ominously says Denied, but apparently Denied also can mean expired

I ended up getting so frustrated that I contacted everyone who supposedly Denied me and asked them why. It turns out most people never even got notified of the ad request. Each campaign has an expire date, and when it hit that date, it just said Denied for everyone that didn't respond. Not sure why they never received notification--ad.ly doesn't have emails or something? I didn't press this point. 

Those who did get notified either said a) they never intended to take ads in their stream or b) they didn't want to do my ad because they didn't know the product, which incidentally I imagine would be most ads. 

My hunch is ad.ly got a lot of people to sign up who either didn't realize what they were doing or said, sure, I'll make money off my Twitter but when it comes time to actually do so, they're like wait, I don't want to show ads to my followers...

Let me back up a bit.

Ad.ly got a lot press for signing up celebrity accounts. Trouble is they're not cheap.

But that's OK--as lead investor Mark Suster said somewhere it's more about the long-tail of the twitter stream. That, is buying $3 tweets instead of $3,000.

I wasn't going to spend for a huge celebrity just to test out the platform. Additionally, I wasn't going to spend for just anyone. I wanted to get people who actually had influence on Twitter--people that have followers that listen to them to the extent that my messages could possibly be retweeted.

Unfortunately, ad.ly's current UI makes it really difficult to find good people to pick. All they tell you is the above two data points (followers and price). If you click on someone you then also get their avg tweets/day, their about description, categories & a link to their profile page. 

This still isn't enough info. At the very least I want to know how many people they follow to weed out those people who have 30K followers but are also following 30K people. So now just to pre-screen people, I have to click once to open this detail view (which is a slow JS fade-in thing btw), and then again to get to their twitter profile page (and we all know twitter can be slow...).

But that wasn't enough for me anyway, because it doesn't tell me anything about influence. So initially I also searched twitter manually for RTs and divided price/follower count to get a sense for how good a deal it was. Needless to say, it was a lengthy process.

For my first campaign I ended up targeting CaliLewis. It was of course Denied. The tweet was "Check out Duck Duck Go, a cool new search engine http://duckduckgo.com/ RT! (Ad)" btw.

For the second campaign I didn't want to spend all the manual effort, so I spent (probably more time) hacking something together :). I ended up doing this:

  1. Downloading the full list of top influential twitter users from trst.me (~22K users).
  2. Hacking ad.ly's URLs and then downloading a big list of people you can advertise with.
  3. Cross checking with the trst.me list to only keep top influencers.
  4. Cross checking that output with the twitter API to only keep people recently retweeted.
  5. Taking that subset and downloading ad.ly info including price, followers, & avg tweets.
  6. Filter out people > 10 tweets/day and then sort by price/follower count.
I didn't want to put all my eggs in one basket so I did 12 people at lower cost and 3 different tweets. The tweets were:
All Denied. At this point I got pretty frustrated and sent out the emails I talked about above. Are my tweets really that onerous? No. It's just apparently hard to actually find people on ad.ly to advertise with.

So for my third campaign, I went with even lower priced people, but still influencers. I figured if I tried it with enough people I would be bound to get some hits, and perhaps smaller fish would be more likely to respond (and actually get the notification). 

I did 20 people, 5 of which were approved. The end result was what you saw at the top: 71 clicks. Was it worth all of this effort? No.

For the record, I used these three ads:
  • Duck Duck Go is the new Google http://duckduckgo.com/ (Ad)
  • Duck Duck Go is a new search engine http://duckduckgo.com/ (Ad)
  • New search engine Duck Duck Go http://duckduckgo.com/ (Ad)
I had approvals in each category (1, 2, 2) and unsurprisingly the first performed best, though the sample size is way too small to be meaningful.

One other annoyance worth mentioning is ad.ly charged my card for the full possible spend even though I only ended up spending 20% of it. That's just annoying.

In the end I got .35CPC. I suppose that isn't bad compared to some other platforms, e.g. Facebook. I'd be interested to know if you try it if the traffic converts well for you.

And of course I didn't try the celebrity strategy, which may actually work a lot better. If anyone has tried that (high price) I'd also love to know the results.

PickFu review

pickfu.pngLately I've found myself repeatedly encouraging startups to use PickFu, so I thought it's time to share that advice with a wider audience. Here's how it works.

You give PickFu $5 and then they get 50 people via Mechanical Turk to do an A/B test for you in the form of a question, e.g. which page/image looks better and why? 

In addition to recommending them to others, I've used it twice so far myself. I made the results public so you can see them. First, I asked about two different homepage logo designs. Second, I asked about two different about page designs. (The latter test I paid a bit more, $9 for 100 responses.)

It was interesting to me that in both cases there wasn't a clear winner. My original concern was people would just pick one and you'd expect an equal split in that case. And I'm still not sure that isn't happening. 

On the other hand, I found the comments people left somewhat compelling. They make sense and so I'm inclined believe most people are actually taking it seriously.

More to the point though, I found the feedback valuable enough to iterate on the About page design and ended up with more of a hybrid approach. I wouldn't have got there without reading those comments. It's really a cheap and quick form of useful feedback.

I'd of course be interested in your experiences as well. Also of note are UserTesting ($40 for videoed user test) and FeedbackArmy ($15 for 10 written up usability tests). I haven't used these sites yet, but plan to do so soon when a need arises. I'd also be interested in your feedback on them.

Free DuckDuckGo Stickers



A few months ago I ordered 1,000 stickers for DuckDuckGo from StickerRobot, and then gave them all away for free to DuckDuckGo newsletter subscribers. (I had a lot of takers.)

So a few weeks ago, I ordered 3,000 more and 1,000 bigger ones, which are pictured above. Now I'm giving them away (still for free) to any DuckDuckGo user who wants them.

I need help spreading the search engine, and I think this is a fun way to do so. These are high quality, weather-proof stickers, so they should be good on your car or on a high-traffic area, in addition to your laptop.


To get them off my desk and into your hands, simply send me your name and address and I'll put some in the mail!

hacker angels

hacker angels is a new group of hackers who are also angel investors. The group currently consists of myself, Joshua Schachter, Jeff MillerRoy Rodenstein and Jim Young

You can follow us all on twitter via the new hacker-angels list. You can also email us at ha@hackerangels.com.

We are all generally looking to invest in other hacker entrepreneurs like ourselves. We are also looking for other hacker angels to join us.

I believe that there are many good hacker entrepreneurs who are not getting the funding or advice they need to get traction for their startups. I also believe hackers relate well with other hackers, which is why I think the concept of hacker angels is so compelling.

We're currently just an informal group that I'm sure will evolve as we get interaction and new members. I look forward to hearing from you!

SEO in #20tweets


Recently I spoke at Dreamit Ventures on SEO. I used Manu Kumar's #20tweets presentation format where I opened twenty tweets in twenty tabs and clicked them off as I went. The talk was recorded by Vijay Kailas from Numote.

The point of the talk was two-fold. First, I wanted to convince the Dreamit startups (and you!) that SEO is not only worthwhile, but is a traction vertical that all startups should consider seriously in the pursuit of traction. Second, I wanted to lay out a an actionable startup SEO strategy that all startups can follow.

Here are the #20tweets:

  1. Startups should have an SEO strategy and spend significant time tracking, evaluating & tweaking it. 5 reasons to follow.

  2. Reason #1 to do SEO: HQ traffic. 88% of Google clicks are organic search (via @randfish). They're looking for stuff!

  3. Reason #2 to do SEO: edge. 2009 US spend on search ads, $18B; on SEO, $1.5B (via @randfish).

  4. Reason #3 to do SEO: precedent. It's worked for @yelp@aboutdotcom @scribd @slideshare @docstoc @nytimes@linkedin

  5. Reason #4 to do SEO: intl users. Just 22% of search traffic is US (via @comscore). Intl can make you an acquisition target.

  6. Reason #5 to do SEO: you can do it. It's not black magic. It's really just generating content and building links.

  7. SEO fact #1: ranking/click % drop-off is huge, ~40% for #1, 12% #2, 8% #3, >=10 (second page) just 10% (via @aol).

  8. SEO fact #2: top 10K keywords get ~18% (via @experian). top 1M ~(very rough)~50% (via @duckduckgo). 50% "long-tail"

  9. SEO fact #3: "20 to 25% of the queries we see today, we have never seen before" (via @google)

  10. SEO fact #4: conversion rates are much higher in the long-tail bc intent is less ambiguous (via @oneupweb).

  11. SEO how-to #1: you really need two SEO strategies, one for the fat-head and one for the long-tail.

  12. SEO how-to #2: what unique data can your business generate? That's the content basis for your long-tail SEO strategy.

  13. SEO how-to #3: make pages people want to link to naturally, e.g. for reputation, posts, resources, answers, stats.

  14. SEO how-to #4: help/nudge people link to you, e.g. URL shorteners, widgets, copy/paste, JS, customer emails, etc.

  15. SEO how-to #5: continually triple check your site for basic issues, e.g. robots.txt, URLs, redirects, duplicate content.

  16. SEO tip #1: anchor text still matters a lot, which can work wonders within your fat-head strategy.

  17. SEO tip #2: for your long-tail strategy, you want as flat a hierarchy as possible, and/or deep links.

  18. SEO tip #3: focus on pages that convert for your business. Traffic is a means to an end. 

  19. SEO tip #4: avoid anything black hat, e.g. buying links. It's not worth the risk of getting blacklisted.

  20. SEO resources: @seomoz @seobook @adwords @compete Google Trends/Insights/SEO Starter Guide

Last year I wrote up some SEO tips, which I still believe. 

My Mixergy Interview


The other day I had the pleasure of being on Mixergy with Andrew Warner, which is a popular video interview series about startups and business tips. There is also an audio version.

The interview is mainly about my last (second) company, Opobox, but it also includes (in the latter half) some q/a about DuckDuckGo and my blog.

It's about an hour, and yet I just really scratched the surface of a number of topics, and realize I left a number of other topics not completely explained. So if you have any follow-up or other questions, feel free to ask them on HN, in the comments below, by email or on formspring.

Paths to $5M for a startup founder



Most entrepreneurs don't do it for the financial reward alone, but it's generally a primary goal in the life cycle. And yet I think many entrepreneurs, especially first-timers, don't pay close enough attention to the impact various decisions have on their personal financial outcomes.

First and foremost, there are co-founders. Mark Suster summed it up great in this Venture Hacks post.

Everyone obsesses with dilution from investors. The biggest dilution comes from co-founders. If you have 2 co-founders, you've diluted 66% before doing any of the hard work. Start by yourself and bring in co-founders for smaller stakes once you've got initial momentum. Unconventional wisdom, but the most economically practical advice you'll ever get. 

Let's put some #s on it. Suppose you want to end up with $5M (gross). Let's say for the moment, after all is said and done, the initial founders end up with 30%. If you have two co-founders (3 people) you'd need a $50M sale to end up with $5M, as you'd get 10% of it personally. With one co-founder, you'd need a $33M sale and with no co-founders, a $17M sale.

Those are huge differences. The universe of companies who can do a $17M vs a $50M sale are greater, and for those companies that can do a $50M sale, a $17M would be of course much easier to swing.

Bottom line, I'd be very wary of taking on a third co-founder from the get-go. And I'd go even farther and consider doing it alone, if just for some time. Yes, there is some real bias against single founders when it comes to fund raising, though it's not impossible. For example, I am a single founder and will fund single founders. In fact, I just did. 

More importantly though, traction trumps everything. Get some traction and funding will flow, if you even want it at that point.

But let's say you want a second founder for fundraising and/or operational purposes. You could consider doing it yourself for a while, and then take on this founder at a less than 50/50 split, e.g. an 80/20 split. That's still an order of magnitude higher than the usual 1-3% the first employee would get, i.e. very attractive. And in this scenario you would have taken some of the risk out of the deal, e.g. by building a prototype, getting the company formed, etc. At that 80/20 split, in the above scenario you'd need a $21M sale, so pretty close to the $17M but with another founder.

Second, let's consider funding. If you do an angel round and then a series A, you're typically down to the 30% founders share I've been using. Here are some ways to get there. 10-20% from the angel round, then 30-50% from the series A and 10-20% from an option pool, which may or may not be allocated by the time of acquisition. So at two rounds of funding you're at 50-90% dilution.

It's doubtful you'll go straight to series A as a first-time entrepreneur and doubtful you'd get 30% unless you've shown a lot of traction. So the original 70% is pretty accurate. If you're in the normal two founder situation, that puts you at that need for a $33M sale to yield $5M personally.

Of course if you raise a third round (or even a fourth), that pushes the needed sale price up further. If you're at 10% founder share with two co-founders, you'd need a $100M exit to get your $5M. And it could be even higher! 

These are the situations where people are shooting for an IPO or a really high acquisition. Not impossible of course, but rare. Only ~15 tech companies are created annually that end up producing 100M+ in revenue, i.e. are viable IPOs.

Now let's suppose you do something that may not need VC. You only take an angel round at 20% dilution and you allocate 10% out of your option pool at the time of acquisition. So now the founders have 70%. At two co-founders you'd need $14M sale to get the $5M. At an 80/20 split, you'd need a $9M sale. If it's just you, you'd need a $7M sale.

Once you get under $10M, the universe of potential acquisition targets really widens. At a 10% dilution (smaller angel round), the #s are $12M, $7M & $6M sales. 

Now let's take it to the logical conclusion.

At no investment and two co-founders, you'd need a $10M sale to get your $5M. At 80/20 that becomes $6.25M. And of course as a sole founder it's just $5M.

Those differences are pretty vast. $5M exit as a sole founder with no investment to $100M exit with several rounds of financing and two co-founders. 

And yet the financial outcome is the same. But the probabilities are not. It's much easier to sell a small company for $15M than it is to IPO.

Update: some comments on HN here and here (repost).

My Gmail is fast again

Gmail_logo.pngAfter my super-slow Gmail post was picked up on HN and on NYT, Google reached out to me. I gave them my username and 39hr later my account is back to normal.

I got approval from the person who communicated with me to share the following snippet of our conversation.

"The team is still looking into your account slowness, but it initially appears that the problem is isolated to a small subset of Gmail users...They are still investigating the root cause of the slowness but in the meantime have moved your account to a different set of servers, which should help."

What I learned at Angel Boot Camp and Techstars demo night

I just got back from the Techstars Boston demo night. Last night I went to Angel Boot Camp. I live outside of Philly, but made the trek up to Boston for both events. Here's what I learned.

  • Lots of companies won't need VC. Chris Dixon recently wrote about how old VC firms should get ready to get disrupted. That was painfully obvious at both these events. 

    At Techstars, every single company was raising a small angel round. Not one company pitched for a Series A and yet a decent portion of the room seemed like VCs. This could have been due to a lot of reasons (advice, selection by TS, etc.), but bottom-line everyone felt it was in the interest of the companies to pitch this way.

    Technology and customer acquisition are now cheap. $200K can get you a lot of validation. But interestingly, because validation is cheap, if it works, the companies may not need to raise more because they'll be instantly profitable. And if they do need to raise more, the valuations will be good.

    I felt validated in my strategy to look for companies that, if everything goes as planned, may not need VC money at all.
  • I need to do more deals. I was already planning on doing more deals, but this need was reinforced. There are two main reasons. First, the simulations show you need to do about twenty deals to guarantee some return given a reasonable distribution of hits. Second, deals create deal flow, and deal flow creates returns. By doing deals your network grows, and in turn, your deal flow.

  • I should invest in hackers. I'm a hacker and I believe I understand the hacker mentality pretty well. I want to invest in people I trust, understand, and most importantly that I personally want to spend a lot of time working with. Basically, I want to invest in people like me :). It's become clear that doing so will both increase returns and increase satisfaction in my angel investing.

  • I need to get plugged in more to the community. I suck at "networking." Like most people, I'm known in some circles, and completely unknown in others. I'd like to be more known in the angel investing community, and should find ways to make that happen.

  • Philly needs work. Boston kept comparing itself to Silicon Valley. Philly is well behind Boston. It's clear that some local super angels would help. Boston seems to have a few.
Thank you to Roy Rodenstein for pushing me over the edge to come up to Boston and attend these events.