HN user
You can visit my website for chapters of my book (in progress) ... thanks
My profile is now changed to dennykmiu ... see ya
Take it as a redeemable loan with the condition that it will be converted into equity upon closing of your next (first) round of investment. You don't need a lawyer for this, just write it in plain English so everyone can understand.
I think YC is a great concept.
It is actually not a VC but more like an adoption agency that takes promising orphans off the street (not based on needs and not based more merits, but based on genetic match) ... feed them and cloth them, then send them off to foster parents (real VC's) who can afford to bring them up properly.
I don't mean to be harsh. And I have great respect for everyone who is involved with YC. And I am certainly not trying to be a sour grape.
I am just saying that it is unique.
I never said that we don't take VC money.
I just said that we take VC money when all we need is money.
Which by way is exactly what these gentlemen did? They didn't treat VC money as R&D money but instead they treat them as working capital. They took VC money when they have paying customers and a working business model and it was time to grow the company.
The point that I am trying to make in my own writing (http://www.startupforless.com) is that entrepreneurs should concentrate on building their company with their own money FIRST and when they have a ready product, they can CHOOSE.
On the other hand, there is nothing wrong with the YC model which is to take money early. But YC is an exception, not the rule. And YC money is clearly smart money.
But there are a whole bunch of us who doesn't fit the YC model.
This reminds me of the old joke about the wife asking the husband on whether or not her butt is fat. There is no good answer here and the absolute wrong one is when the husband asks for the definition of fat.
There is no definition of smart versus dumb money that would serve the discussion here.
My observation is that many of the Hacker News readers are first time entrepreneurs and my belief is that it is important that they understand that they don't build companies by relying on VC money (even if it comes from YC). The more they accept that VC money is dumb, the more they will focus on what it takes to build their companies.
For a bootstrapping entrepreneur, VC money is a drug and a distraction. And by calling it "Smart" money, the popular culture is attempting to turn it into a "legalized" drug. This is a really good article and having been in the trenches for many years, I highly recommend it to the YC community. VC money should be dumb, the dumber the better. Only by understanding this assertion, can one focus on what it really takes to build a company ... and it is not about taking VC money. Enjoy.
I agree. I think the article basically summarizes what we have all learned (the hard way) ... ahead of your competitors but never too far ahead of your customers.
Thanks. I am from the old World.
Perhaps we should focus on the message and not messager (sp??).
--Denny--
Note: English is my second language.
This is a fantastic article summarizing what I have learned and what I tried to write on my own (http://www.startupforless.com).
I am humble by it.
Basically it boils down to the following ...
1) Create "value", not "valuation" 2) Be a "surrogate" customer, live their lives and adopt their persona 3) Be frugal, use your VC money as working capital and treat it as the last money you ever going to have and need 4) ... and more
--Denny--
Yes, it is the first user conference for the open source network analysis software. Sharkfest is the new name for Ethereal. It will be a great conference, meeting the man himself, my hero, Gerald Combs. And it is in our neighborhood.
This opens up another topic that is equally interesting, which is the relationship between entrepreneurs and risk management.
My observation is that entrepreneurs are NOT risk takers. They are very much risk-averse. This is a strange comment but as an entrepreneur, I differentiate between taking risk and mitigating ambiguity.
I don't gamble and I don't play the lottery. I think doing so would be taking undue risk because I have absolutely no control of the outcome.
On the other hand, doing startup is not risk to me because I believe I can control the outcome. It is just that the outcome is somewhat ambiguous which I know how to mitigate.
I suppose if I take a step back, this is not unlike the difference between an amateur gambler and a professional gambler. If I know how to count cards, I won't think that I am taking risk neither.
--Denny--
It depends entirely on the criminal ... ;-)
It is a tough call. The primary site, LoveMyTool, is an on-line marketing site for network monitoring TOOLs so at least there is some excuses for it.
It is a difficult name to forget.
--Denny--
That's exactly right, thank you.
In some way, VC money is a contaminant and startups that have lots of VC money (my first startup was one of those) tend to forget this truth.
--Denny--
Sorry about that. I hope all is forgiven.
--Denny--
I agree with that. I think they are closely related.
However, my experience is that as entrepreneurs we can lure ourselves into thinking that bringing good to the world and building a great company is the end and not the means. And if we do that, then money will follow. This is the primary message from Guy Kawasaki whom I have tremendous respect for.
However, my own experience is that this is true is if the stars and moons are aligned. So I am offering an alternative which is to focus on making money first.
This is in contraction to what a VC would want to hear. But I am of the opinion that taking VC money is not the prerequisite of building startup.
At the same time, I am not trying to demonize VC's. They have a place in our world and when appropriate, it can be very important to us.
In summary, I just want to provide some food for thoughts.
Thanks for your comment.
--Denny--
This might help ...
Hope this helps ...
Actually #2 is relevant.
"2. When asked how you will launch if no investors are found, your mind goes completely blank."
Sadly I suspect a large number of Hacker News readers are more interested in getting VC funding than they are in bootstrapping.
--Denny--
I agree with comments from other posters. The only two things that I would add are that ...
1) you don't need to like someone to work with them in a startup.
In fact, it is very important that you surround yourself with people who have complementary skills and have different lifetime experience and perspective. As a result, it is difficult to truly like someone who is that different.
But you must respect someone in order to work with them in a startup.
2) Trust is very important.
But trust has a different meaning in a startup. Imagine yourself having to jump off a baloney and one of your co-founders is the one who needs to catch you to save your life. In this case, trust means trusting their ability to catch you and their assessment of their ability to catch you. So if you ask "can you catch me?" and they say "yes" but in reality they can't, then you would rather that they say "no". That way, at least you would try to find alternative.
I do not disagree with Zak.
However, stereotype has its limits in startups. My own experience is that most formal training is counter-productive when it comes to running a startup and all of us need to "unlearn" whether we are a lawyer or a hacker.
I summarized my observation as the following ...
"Anyone can be an entrepreneur but they must not have the mindset of a lawyer, an engineer ("hacker") or a doctor.
First of all, there are always more than two sides to an issue and often the right place is to be is in the middle - an option that a lawyer does not have. Also, there is not always an answer to every question; or if there is an answer, it might not be unique. So waiting for perfect data to arrive at a perfect solution is a luxury that I don't have as an entrepreneur. If that bothers me, then I should go back to being an engineer. Finally, as an entrepreneur, I often have to shoot my patient (and I have)."
http://www.lovemytool.com/blog/2007/10/vc-worst-enemy.html
Hope this helps.
--Denny--
Denny K Miu
Samantha:
In one of my earliest post, I wrote about what makes startup fail (or succeed).
http://www.lovemytool.com/blog/2007/09/why-startups-fa.html
What I have learned in the last five years turns to be very different from what I have learned in the five years before that. When there was a viable market for startups (i.e., robust IPO and M&A opportunities), the limitation often had to do with money. But when there is no market (i.e., no liquidity) for startups (as it is now), success has to do with a viable market for the product.
So it seems to me that it doesn't really matter if you are a lawyer or a "hacker", as long as you are the "surrogate" customer and knows intimately what your targeted customers want and what their pain points. Then having a "hacker" as a partner is important only so far as he/she will be the one to implement the product idea and is in fact, quite "interchangeable".
Good luck.
--Denny--
Denny K Miu
Rafael:
Good luck. It helps to know that none of us is alone in our struggle.
--Denny--
I recently wrote up my own experience on how to recover from a startup failure.
http://www.lovemytool.com/blog/2007/10/riding-a-bike.html
Hope it helps. If there is any other way I can help, please comment. Good luck.
--Denny--
Denny K Miu
I am in the process of writing this up as the next chapter of my online book but a family emergency came up so rather than waiting, I will just repost an earlier comment.
Assuming your are a bootstrapper meaning that you have a few co-Founders who are the key contributors and can each afford to not take salaries for at least two years to get the product off the ground, then your best bet is to form a LLC (Limited Liability Company). Keep in mind that bootstrapping is not a permanent state of mind but rather a pramatic approach to build a viable company and maximize your chance of success as well as your networth. If the old argument was "A small slice of a larger pie is better than a large slice of a small pie", bootstrappers are all about getting a "medium slice of a medium pie". The idea here is that you want to take the company to a point that if you still need money from a VC, you take money when all you need is money.
*
My experience is that LLC (Limited Liability Company) is a much better vehicle for starting a company than a S-Corp. LLC is an interesting hybrid between a corporation (S or C) and a partnership.
Legally LLC is not a corporation but more like a partnership. But it is an effective shield for limiting your personal liability the same way that a corporation would, yet at the same time, doesn't require the declaration of a liability-bearing general partner which is what you have to do with a Limited Liability Partnership (LLP).
Also, from the customer perspective, an LLC sounds a lot like a corporation so it doesn't have the stigma that comes with an LLP (people think of dentist, doctor and lawyer when you present them a business card that says LLP). Just like LLP or a S-Corp, an LLC is not a taxable entity so losses and profits can flow directly to the partners.
On the other hand, unlike an S-Corp, the profit and loss can be distributed anyway that is agreeable to the partners and not necessary according to the percentage ownership, which is very convenient.
Also, LLC has no limitation on foreign ownership or ownership by another corporation (Until it became AT&T again, Cingular was a LLC owned by SBC and BellSouth).
All it takes to form a LLC is an operating agreement, which is not even a legal document and does not need to be filed. So you don't need a lawyer to do what is basically common sense. So be sure you spell out the ownership structure of the LLC (there is no reason why it has to be equal but there is no reason why it cannot be, so whatever is agreeable to all partners is fine).
But be sure to spell out the circumstances when a particular partner is deemed non-contributing and therefore can be invited out by the rest of the partnership. Also, spell out what happens to his/her shares if any partner was to resign, to be terminated with and without clause, incapacitated and death (either work-related or not).
So a typical solution is to give everyone three or four years to vest and everyone agree that any shares that are unvested can be repurchased by the remaining partners at the original price. Also, make sure that everyone agrees to a right-of-first-refusal and a co-sale arrangement so that if one partner decides to sell his/her vested shares, everyone else has the right to either buy the shares or to sell part of their own vested shares to the same outside buyer at the same time.
Furthermore, make sure you put a price on the shares so that everyone writes a check and buy the shares outright (which can be very low so that the total is on the order of a few hundred dollars). This is very important because once the stock is purchased, you have started the clock for capital gain and keep in mind that these are 1244 stock which means that if you keep them for five years (which you probably will since that's how long it will take to build a company if not more), then only half of your capital gain is taxable.
There are other benefits as well but the most important one is that if you ever leave your own startup, you can walk away with property that you already owned and you don't have to worry about exercising your options and get hit with Alternate Minimum Tax (AMT).
On the other hand, for working capital, ask everyone to put in the cash as an interest-bearing loan so that when the company starts making profits, you can get the money back without any tax consequence.
Also, even as a LLC, you can elect to file your tax return as a S-Corp. This is important because as you continue to bootstrap your company, instead of paying the partners salaries, you can pay everyone a nominal stipend (which is subject to payroll tax) and declare the rest dividend, which is not subject to self-employment tax (it would be if you file tax return as a LLC).
Finally, when you are ready to take VC money, they will want to bring in a high-power lawyer and chances are that they will want you to form a C-Corp. By then, you can do a tax-free transfer between assets of the LLC and shares of the new company. The VC's are going to put a vesting schedule on your new shares, which you will need to negotiate. But hopefully by then you have some leverage (like customers and profitability) and you can negotiate from a position of strength.
But the most important issue here is that with a C-Corp you can start from a clean slate which is what the VC's want.
Hope this helps.
--Denny--
Denny K Miu
I wonder if "puneetht" got the message? I hope so.
--Denny--
By the way, if you are interested in learning more about the trials and tribulations of a startup, please take a look of my online book, http://www.StartupForLess.com.
--Denny--
In the early 2000, we had Asian financial crisis, Y2K, dotcom bomb, telecom burst, stock market crash, 9/11 attack, war in Afghanistan, SARS, launch of the Iraq invasion, outbreak of avian flu, but yet in retrospect, it was the best time to do a startup. So you can't really differentiate with good timing. But you can differentiate from bad timing. When it is difficult for you, it is also difficult for everyone else. But they don't have the same strong will to succeed as you do. By the way, if you have the luxury of pondering where or not this is the right time to leave your day job, my advise is to stay where you are and just wonder out loud what could have been and should have been. It really takes a lot to succeed in a startup. Having any backup plan is the wrong place to start. Good luck.
Take a look of the following which is my on-line book in progress. One of the chapter is entitled "How to turn your VC into your worst enemy".
At the end of the post, there are quite a few links for comments from successful entrepreneurs on their experience with VC's. My own advise is to deal with VC's as what they are, not what you think they are.
Do not romanticize, but also do not demonize.
The problem is not one of skills and affinity but one of command structure.
A startup with multiple equal co-Founders is a partnership. No one in a partnership bears fiduciary responsibility. Each partner is responsible for their own interest and that of their family and no one else. So for partners to make decision, they barter. They each decide what they want from each other and out of necessity, they come to a common ground.
At the beginning of a startup, this is not a problem because like a hunting party, they are consumed by their own survival and their common ground is the only ground. The hunters are both owners and executives but there is no conflict.
But as the startup grows and becomes successful, the partners (i.e., co-Founders with more or less equal stature) will have a problem finding common ground.
On the other hand, a company is not a partnership. Company is owned by shareholders, whose interests are represented by the Board of Directors. The Board members (i.e., village elders) are not the executives but instead they appoint an executive (village chief) to run the company (village) on their behalf. The chief executive is given a mandate by the elders and he/she surrounds himself/herself with fellow executives, who together share the fiduciary responsibility.
So for a hunting party to evolve into a village (or a startup to evolve into an operating company), the original co-Founders will have to evolve from a co-owner to co-executive, replacing their ownership interest by fiduciary responsibility, and learn to change their decision making process from one of bartering to one based on mandate.
This sounds easy but almost never done properly.
--Denny--
Denny K Miu