One of the greatest advantages of sitting right next to a CFO is that I get to interact with him frequently. Over the last year or so, I have learned quite a bit about Startup Financing, Cap Structure, Stock options, etc during these interactions. There are 3 very important things that an entrepreneur has to watch -
1. Total number of Authorized shares - this is the maximum number of shares that can be issued to investors as registered with the state of incorporation. Of course, companies have the option of increasing, splitting or reverse splitting the number of authorized shares relatively easily and often do so when they raise new rounds of funding.
2. Total number of Outstanding shares - this is the number of shares that are held by stockholders. The more common use, in high tech vernacular, is Fully-diluted outstanding shares which is the outstanding shares plus the shares reserved for issuance under stock option plans (grants + cancellations + remaining to be granted) plus the amount of shares to be converted under warrants and convertible debt. Essentially, the number of shares if every right to a share of stock as converted
3. Liquidity option on Preferred stock - shares held by employees and founders are typically Common stock. VCs get preferred stock which normally as a “liquidation” preference which means in the event of a liquidity event, they have to be repaid before Common stock is. The liquidity option determines the amount to be repaid for each preferred stock if a liquidity event occurs (acquisition, bankruptcy, etc). Common stock holders get paid only after all the preferred stocks have been repaid in full.
Let's take an example and walk through these numbers.
Lets say a friend and you decide to float a company, Acme Industries. You typically incorporate in Delaware (it has the friendliest corporate law) with a total of 100 Million Common (Authorized) Shares at a par value of $0.001.
Between the two of you, you decide to hold on to at least 60% of the Common shares to ensure that you have a controlling interest. This would amount to 30 Million shares each for a total cost of $30,000. Typically, this would create the basis for you to go add sweat equity for future work on the company You'll allocate a further 20% (20 Million shares) for future stock and option grants(key employees and future issuance). The remaining 20% can be used to attract outside investors with preferred shares convertible into common should you be fortunate enough to do an IPO (more on this later).
Once you have the prototype, you start pitching to VCs to raise enough capital. Lets say KPCB decides to advance a term sheet to buy 10 Million of Series A preferred stock at a “pre-money value of $30,000,000 or $0.50 per share. You would float 10 Million Preferred shares at par value of $1 for KPCB to bring the “post money valuation” to $40,000,000. At this point, the VC firm has a 9.1% stake in your company (10M shares/110 M).
Term sheets are normally loaded in favor of the investors, esp. when presented to a first time entrepreneur. Make sure you pay close attention to the liquidity option - this is a hidden cost of the capital that you will have to pay later on. Liquidity options vary between $1 and $2 depending on market conditions. I'm told $1 liquidity options are available these days, but during the difficult 2004-05 period, $1.25 was the most common option with some going as high as $1.75.
If all goes well, you would become cash flow positive with just a Series A funding and work towards your exit plan. Acquisitions are more common than IPOs, so if your company gets acquired for $20 million, you'd repay the investors $10 million (if you've a liquidity option of $1) and share remaining $10 M amongst the shareholders.
More often than not, companies require a Series B, C, D or more funding before they are able to exit. In such cases, companies are forced to increase the number of authorized shares (because total Common outstanding + total Preferred outstanding must never be greater than total authorized). This causes a dilution in the stake of common shareholders. Top executives often negotiate “dilution protection” so that they will receive the same % of options for one round following hire so their relative position stays the same. Thus a new CEO would be incentivized to raise money right away and not wait and try to protect their stake as a % of the total dilutable options, which means that they are given enough options to maintain their stake at a certain percentage. They also ask for the Cap table or cap structure so that they know how much their stake in the company is relative to other shareholders. This is rarely done for regular employees, but something to keep in mind as you grow in your career and look for opportunities.
Finally, the best advice for entrepreneurs is that they get themselves a very good attorney with lots of experience before they start raising funds to negotiate a good term sheet. Top attorneys can get things done effectively and quickly, however, they must also balance their VC connections since they are a great source of referrals and would hate to bite the hand that feeds them :)
Monday, June 16, 2008
Saturday, March 22, 2008
AppXchange Application
Hello Everyone,
We have published our Product Management App in Salesforce.com's AppXchange platform. You can get it from here -
Product Management by Solidcore 1.0
We have published our Product Management App in Salesforce.com's AppXchange platform. You can get it from here -
Product Management by Solidcore 1.0
Saturday, March 15, 2008
Product Management Software
I attended the P-Camp today and heard Christina Noren from Splunk talk about Automating product management in an agile context. The gist of the talk was how she had customized Jira to track bugs, feature requests and problem statements and automate their prioritization and PRD creation using various metrics. Solidcore takes a very similar approach to structured Product Management and I am sharing our experience building such a tool. When we realized that we had grown beyond the stage where all feature requests and the roadmap could be tracked in a spreadsheet, we started looking for a solution that -
We customized our Salesforce.com accounts (which we use for sales, marketing and customer support) to also track feature requests. We ask our Sales Engineering and Sales team to provide a weekly report of all the ideas that they heard about (during Demos, RFI/RFP questions, customer deployments, negotiations, etc) and capture it in the system. To illustrate this, I am going to take the example of a TelePorter product and show you how we'd manage such a product. All these features are captured in the system and as you can see in the following two screenshots, we can use the system to just capture feature requests without assigning them to a release.
Every feature also has detailed feature requirements (and the requirement number) as shown below.
The system also allows product managers to target Customer cases and bugzilla bugs to specific releases and share the information with the support and engineering teams. No longer do they need to come to Product Management to get the date for the release as it is available from this association (as well as from the cases tab in SFDC).
During our regular roadmap meetings, we use reports to evaluate features based on their popularity, opportunity cost which is derived from the salesforce opportunity field, their impact on TCO for the customer, etc. and target them to specific releases.
The roadmap and the PRD are then auto-generated as reports, as shown below.
Incidentally, we realized that the reporting infrastructure of salesforce has some limitations that makes it unusable. So, we use Crystal to develop these reports and their salesforce.com connector works like a charm. We are seriously considering sharing our App in AppXchange for free and sell the report definitions for a nominal amount. If interested, please send me a note.
- would streamline our requirements elicitation and capture process
- help us prioritize features and cases using various metrics like opportunity cost and customer commitments
- improve communication with various other departments like engineering and support
- would integrate with our existing systems (Salesforce.com through which we dealt with external case requests and Bugzilla, our internal bug tracking system)
- they worked best when all the data was captured using that tool
- they were expensive
We customized our Salesforce.com accounts (which we use for sales, marketing and customer support) to also track feature requests. We ask our Sales Engineering and Sales team to provide a weekly report of all the ideas that they heard about (during Demos, RFI/RFP questions, customer deployments, negotiations, etc) and capture it in the system. To illustrate this, I am going to take the example of a TelePorter product and show you how we'd manage such a product. All these features are captured in the system and as you can see in the following two screenshots, we can use the system to just capture feature requests without assigning them to a release.
Every feature also has detailed feature requirements (and the requirement number) as shown below.
The system also allows product managers to target Customer cases and bugzilla bugs to specific releases and share the information with the support and engineering teams. No longer do they need to come to Product Management to get the date for the release as it is available from this association (as well as from the cases tab in SFDC).
During our regular roadmap meetings, we use reports to evaluate features based on their popularity, opportunity cost which is derived from the salesforce opportunity field, their impact on TCO for the customer, etc. and target them to specific releases.
The roadmap and the PRD are then auto-generated as reports, as shown below.
Incidentally, we realized that the reporting infrastructure of salesforce has some limitations that makes it unusable. So, we use Crystal to develop these reports and their salesforce.com connector works like a charm. We are seriously considering sharing our App in AppXchange for free and sell the report definitions for a nominal amount. If interested, please send me a note.
Saturday, February 16, 2008
Customer Acquisition Costs
I had been to the barbershop yesterday and it set me thinking about their customer acquisition costs. Here's an example -
If suppose, they get a new customer, who has never been to their saloon before, their tendency is to offer the best service in order to make the customer a regular customer. Now, lets assume that the customer becomes a regular. The Barber's interest is best served when they don't cut enough hair (so that you come back sooner).
There are a lot of other companies that have this conflict of interest. We know how new cable/internet subscribers get very good deals for the first few months, which go away after the first few months in the contract.
Question is - what is the commonality between these businesses that treat new customers better than existing ones ??
I posed this question to my friend Torsten, who is an economics major in Pittsburgh and got this response -
If treating new customers is costly (in the sense that it minimizes the business's utility), then one commonality could be that the businesses value a long-term business relationship, i.e. they accept high startup costs (or less profits) in exchange for making more profits with the customer over the long term.
Another commonality of such businesses could be get a foothold into a new market and getting some customers with which they can earn the trust of more potential customers ("look, we are working for IBM - if they trust us, you can do so, too). From the other extreme, a quasi-monopolist could be interested in deterring new market entrants. Say, the big existing car companies are meanwhile realizing that they have done too little on a global scale to capture the new up and coming lower and middle-income customer groups in developing countries. As a result, companies such as Tata are now introducing $2,000-3,000 cars, capturing a huge market.
However, this market deterrence does not necessarily work everywhere. Our former laundry guy in Palakkad was not known for the quality of his work, but no one could change to another laundry since these guys had contracts among themselves preventing them from doing business in each other's area. Can you think of any other examples?
If suppose, they get a new customer, who has never been to their saloon before, their tendency is to offer the best service in order to make the customer a regular customer. Now, lets assume that the customer becomes a regular. The Barber's interest is best served when they don't cut enough hair (so that you come back sooner).
There are a lot of other companies that have this conflict of interest. We know how new cable/internet subscribers get very good deals for the first few months, which go away after the first few months in the contract.
Question is - what is the commonality between these businesses that treat new customers better than existing ones ??
I posed this question to my friend Torsten, who is an economics major in Pittsburgh and got this response -
If treating new customers is costly (in the sense that it minimizes the business's utility), then one commonality could be that the businesses value a long-term business relationship, i.e. they accept high startup costs (or less profits) in exchange for making more profits with the customer over the long term.
Another commonality of such businesses could be get a foothold into a new market and getting some customers with which they can earn the trust of more potential customers ("look, we are working for IBM - if they trust us, you can do so, too). From the other extreme, a quasi-monopolist could be interested in deterring new market entrants. Say, the big existing car companies are meanwhile realizing that they have done too little on a global scale to capture the new up and coming lower and middle-income customer groups in developing countries. As a result, companies such as Tata are now introducing $2,000-3,000 cars, capturing a huge market.
However, this market deterrence does not necessarily work everywhere. Our former laundry guy in Palakkad was not known for the quality of his work, but no one could change to another laundry since these guys had contracts among themselves preventing them from doing business in each other's area. Can you think of any other examples?
Sunday, December 16, 2007
Fast Typists help Solidcore!
I received some interesting comments about my previous post, one of which enquired about Solidcore's innovation. Its time I responded to that. Much like our biggest competitor, our roots are in security and despite a shift in strategy to focus on the compliance and control market space, our original product continues do extremely well. In fact, a good 40% of all ATMs in Germany will be using the Solidcore Embedded product by end of 2008 for Change Control. The same product has hockey-sticked in Japan where all new Printers, Point of Sale machines and ATMs are shipping with Solidcore. But, the icing on our cake was Bsquare's recent announcement that the they'll OEM our product to provide security for "embedded devices in the marketplace that are vulnerable to several types of change control risks, ranging from traditional threats like viruses and malware, to internal threats such as employee sabotage"
So, why is this product taking off in these markets? I talked to one of our customers from Japan and they gave a very interesting factor that led them to us. Apparently, in the fast paced Japanese markets, retail branches are made (or broken) based on how quickly they can service their customers during checkout. This has forced all the checkout clerks to learn to type extremely fast. Turns out, some branches/stores were performing much better than others and a detailed analysis by our friends helped them realize that the anti-virus software on the checkout systems would often slow down the programs. This slowdown, often imperceptible, was however, just enough to ignore some keystrokes of fast typists. This led to billing errors, which led to a longer service time, lost business and ultimately a thriving business for Solidcore. Clearly, we did not lose out any momentum in our first product, even though we chose to focus primarily on Enterprise Change Control.
So, why is this product taking off in these markets? I talked to one of our customers from Japan and they gave a very interesting factor that led them to us. Apparently, in the fast paced Japanese markets, retail branches are made (or broken) based on how quickly they can service their customers during checkout. This has forced all the checkout clerks to learn to type extremely fast. Turns out, some branches/stores were performing much better than others and a detailed analysis by our friends helped them realize that the anti-virus software on the checkout systems would often slow down the programs. This slowdown, often imperceptible, was however, just enough to ignore some keystrokes of fast typists. This led to billing errors, which led to a longer service time, lost business and ultimately a thriving business for Solidcore. Clearly, we did not lose out any momentum in our first product, even though we chose to focus primarily on Enterprise Change Control.
Saturday, November 17, 2007
Marketshare and Product Innovation
One of my biggest challenge as a Product Manager is to prioritize the features, enhancements and bugs to be fixed in our product. Around the same time last year, my goal was to get a polished and well-designed product to market. During various releases, there were times when I felt we could have done better - fixed more bugs, enhanced the usability of the product, introduced new features, etc. Oftentimes, Sales and Marketing dictate time to market and Product Managers have to make the best use of limited time and resources. Looking back, I feel that we did a good job because we have been able to sell and deploy at a very rapid pace in the last 12 months.
Having been involved in various decisions that brought us here, I feel very proud when I hear stories from the field about how quickly our customers learned to use the product and how valuable it is for them. I also know that the base product, without any further modifications, will continue to sell because of the value it delivers. However, as a startup with deep roots in technology (our CEO has a PhD in Computer Science), we continue to invest significantly in product innovation and also make enhancements requested by our customers.
Interestingly, our biggest competitor, Tripwire, has adopted a completely different approach. I have seen various demos of their product, but have always come back with the impression that Tripwire's strategy is more focused on product positioning than real product innovation. Any IT admin who has used their product will tell you that their latest product is not significantly different from what they were selling 2-3 years ago. What has changed is their Marketing message - In Nov 2004, they pitched Availability, Nov 2005 was all about Change Auditing, they followed us in talking about Change Control in Nov 2006 and their current theme is around Continuous Compliance. I am sure they are doing extremely well, selling more and more licenses every year with minor tweaks to their branding. Guess we just have very different operating philosophies.
There is one other product that I have used for the last 5 years which has hardly changed - Microsoft's Outlook. Outlook is a great product for collaboration, but has some significant limitations - primarily around search. Ever tried searching your 2GB Outlook mailbox for an email and compared its speed to a similar operation in the free Gmail? Have you ever lost messages when your Exchange server's files got corrupted because no one likes to delete their older messages? Its not as if Microsoft does not know about these issues, but they probably don't see any value in fixing these problems. Now, Microsoft is hardly a company that you can accuse of sloth, but I'd hate to be the Product Manager for Outlook now. Microsoft seemingly prefers to encourage the development of a productivity eco-system around Outlook than incorporating basic features in their own product :(
I have tried some of the productivity tools over these years. Lookout, the one that Microsoft bought, had its power in its simplicity. They used Lucene to index the mails. Keyword search was very fast, but advanced search features were not really well supported. Google's Desktop Search uses some really fancy technology to index emails and all files on your desktop unobtrusively, but their approach is too generic and not oriented towards email search. As an example, there is no easy way to locate an email and drag n' drop it into a new email draft. This is such a common operation and the lack of support for this feature made me look at other products. X1's search and interface are really powerful, but you've to pay $50 for a single-user license. Not a steep price for its functionality, but still a greater barrier than the free products. Some of my colleagues use Copernic and NEO. Copernic, like Google Desktop Search is a full computer search tool and NEO is primarily an email organizer, but with better search capabilities than Outlook. I'm sure there are a few more such utilities, but these are probably the major ones.
Does this mean that a company, once it has established itself as the market leader, finds no incentive to innovate? Both Microsoft and Tripwire went into sustenance mode because they maneuvered themselves into a position of strength. However, they are now facing a lot of heat from highly innovative and nimble competitors and I expect to see some major enhancements in both Outlook and Tripwire very soon. This maybe either through organic product enhancements or through integration with other tools.
Having been involved in various decisions that brought us here, I feel very proud when I hear stories from the field about how quickly our customers learned to use the product and how valuable it is for them. I also know that the base product, without any further modifications, will continue to sell because of the value it delivers. However, as a startup with deep roots in technology (our CEO has a PhD in Computer Science), we continue to invest significantly in product innovation and also make enhancements requested by our customers.
Interestingly, our biggest competitor, Tripwire, has adopted a completely different approach. I have seen various demos of their product, but have always come back with the impression that Tripwire's strategy is more focused on product positioning than real product innovation. Any IT admin who has used their product will tell you that their latest product is not significantly different from what they were selling 2-3 years ago. What has changed is their Marketing message - In Nov 2004, they pitched Availability, Nov 2005 was all about Change Auditing, they followed us in talking about Change Control in Nov 2006 and their current theme is around Continuous Compliance. I am sure they are doing extremely well, selling more and more licenses every year with minor tweaks to their branding. Guess we just have very different operating philosophies.
There is one other product that I have used for the last 5 years which has hardly changed - Microsoft's Outlook. Outlook is a great product for collaboration, but has some significant limitations - primarily around search. Ever tried searching your 2GB Outlook mailbox for an email and compared its speed to a similar operation in the free Gmail? Have you ever lost messages when your Exchange server's files got corrupted because no one likes to delete their older messages? Its not as if Microsoft does not know about these issues, but they probably don't see any value in fixing these problems. Now, Microsoft is hardly a company that you can accuse of sloth, but I'd hate to be the Product Manager for Outlook now. Microsoft seemingly prefers to encourage the development of a productivity eco-system around Outlook than incorporating basic features in their own product :(
I have tried some of the productivity tools over these years. Lookout, the one that Microsoft bought, had its power in its simplicity. They used Lucene to index the mails. Keyword search was very fast, but advanced search features were not really well supported. Google's Desktop Search uses some really fancy technology to index emails and all files on your desktop unobtrusively, but their approach is too generic and not oriented towards email search. As an example, there is no easy way to locate an email and drag n' drop it into a new email draft. This is such a common operation and the lack of support for this feature made me look at other products. X1's search and interface are really powerful, but you've to pay $50 for a single-user license. Not a steep price for its functionality, but still a greater barrier than the free products. Some of my colleagues use Copernic and NEO. Copernic, like Google Desktop Search is a full computer search tool and NEO is primarily an email organizer, but with better search capabilities than Outlook. I'm sure there are a few more such utilities, but these are probably the major ones.
Does this mean that a company, once it has established itself as the market leader, finds no incentive to innovate? Both Microsoft and Tripwire went into sustenance mode because they maneuvered themselves into a position of strength. However, they are now facing a lot of heat from highly innovative and nimble competitors and I expect to see some major enhancements in both Outlook and Tripwire very soon. This maybe either through organic product enhancements or through integration with other tools.
Saturday, October 6, 2007
AJAX and Bandwidth Savings
One of Solidcore's components is developed using Google Web Toolkit (GWT). GWT was introduced about 2 years ago and allows developers to develop web applications using Java. Though Java was used for server-side development even before its introduction, GWT pioneered the concept of a java-to-javascript compiler that allows developers to develop and debug in Java using their favorite IDE and tools. The compiler is used to convert the code into javascript which can then be deployed on an application server. Click here to know more about GWT and if you've already played with GWT and want to meet the team behind this innovation, you may want to register for this eventOur GWT application is extremely user-friendly and uses AJAX to provide a great experience to the user. I had never imagined that such functionality could be delivered through the web browser! Not only is the user experience better, there are some ancillary benefits like bandwidth savings. By obviating the need for full page refreshes, AJAX helps reduce the amount of traffic. This article uses simple examples and does the math to explain how large-scale web applications can derive significant cost savings. However, the best is yet to come. Our application results in a single javascript file, which together with gwt.js, is nearly 150KB in size. If we could optimize this to fetch the javascript functions on-demand, we could make the startup times faster and further reduce the bandwidth. Here's an excellent article describing this in case you are curious about how this can be done.
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