Monday, March 17, 2008

Introducing Earl

This is my new roommate Earl the bearded dragon.

The Nigerian Mergers and Acquisitions Scam

Let me tell y'all about the Nigerian M&A scam. Here's how it goes, a small company (Smallco) gets an offer to be acquired by a large company (Bigco) and all the founders are thrilled because they're about to become multi-millionaires. Bigco feeds on Smallco's greed to rub out Smallco. Here's how the burn works;
  • Smallco spends hundreds of thousands in legal fees during due diligence
  • Bigco ties Smallco down in a 'no-shop' agreement that means Smallco can't go get re-financed
  • Bigco stresses everybody out at Smallco and Smallco's business suffers because everybody is working hard on retiring
  • Smallco employees and founders are shopping for yachts, watching Bigco stock prices and ignoring their business
  • Bigco examines all of Smallco's customers, technology, share structure and decides that there's patent/intellectual property/scalability etc. issues and drops the offer by half at the last minute
  • Bigco now decides that the offer is all stock and the shares are restricted and are in escrow (i.e. very hard to sell for a long long time)
  • Smallco is out of money and accepts the offer
  • Smallco founders get stuck with shares in Bigco that they can't sell for years and watch the stock drop to pennies
  • Smallco founders likely owe significant taxes based on the capital gain at the time the acquisition took place and not at the time the founders can sell their paper

All in all, the Smallco founders are fucked and lost a crazy amount of real money (vs make believe stock money) and are probably broke and demoralized. Variations of this story happened a thousand times over in the dot com days and will keep happening in more subtle variations over time. This is just like a corporate version of the Nigerian scam.

Things to learn from this scam:

  • Find a lawyer/firm who'll spot these problems and let you know about them on day 1 of your deal
  • Don't confuse shares for cash
  • Escrow sucks, get at least 2 X cash value of the Company in cash and enough cash to cover taxes & legal fees
  • Restricted stock sucks
  • Cap gains taxes suck, get good tax advice
  • Get a deposit from Bigco
  • Find 2 Bigcos and let them bid against each other

As for me, I've been burned by escrow, legal fees and no-shops. Luckily I never sold my company for Bigco stock, it would mostly be good for toilet paper today. As my NDA's have expired, I can tell you that my Bigco's were Intervu, Akamai, Yahoo and Microsoft. Intervu sucked us dry and luckily I told them to keep their paper which is why my I no longer have any business partners. We never got very far with the others so I can't say if they would have tried all of the dirty tricks but from what I've heard Cisco made the playbook.

Sunday, March 16, 2008

My New Friend Earl

My GF and I adopted a bearded dragon this weekend named Earl. Pics to come. Who knew that a lizard could have a personality?

Monday, March 10, 2008

My Startup Rules

Here my first crack at a list of startup tips:
  1. Love what you're doing passionately enough to not sweat the short term pain of things going wrong and not having much cash.
  2. Learn how to explain what you're offering to non-industry people in under 10 plain English words and make that your whole company's mantra.
  3. Love your customer and provide something of incredible value to them. If you would be a passionate buyer of your product/service then you're probably on the right track.
  4. Hand pick a team that really believes in what they're doing and confront them with kid gloves regularly if they seem distracted or disinterested. Discard bad apples QUICKLY!
  5. Build a cult around what you're doing. If you, your team and your customers believe strongly in what your doing then nothing can stop you (See point #1).
  6. Read as many books as you can about your field and people that have succeeded, learn from others successes and mistakes.
  7. Buy cheap stuff and have an ugly office if you never have customers come over. You can buy tables for $100, chairs for $250 and computers for $1000. Get furniture at office refurb/recyclers cheap if you need a pretty office. Get as much software as you can for free/cheap from Microsoft/Oracle/Whoever dev programs.
  8. Get to cash flow positive as quickly as you possibly can unless you are ready to hand over some of your company to investors.
  9. Don't give everybody a phone extension until they are talking to paying customers regularly.
  10. Forget about hype and tons of tiny customers and find yourself a really nice big reference account that loves what you're doing and will fund your new projects. This is of course assuming you're not starting a dollar store or micro commerce business.
  11. You don't need a full time accountant but you'd better have tight control over your pennies because they'll evaporate quickly.
  12. Try to do the rounds and talk to everybody in your office at least twice a week to see how they're doing.
  13. Pair people up in teams that depend on each other so people don't slack off on their own moods as much.
  14. Experiment with variations of what you're doing if it isn't working well.
  15. Don't work crazy hours + weekends non-stop all the time unless you want to miss out on life and be a bitter rich asshole, there's a time to walk and a time to sprint. Choose them wisely. Same goes for your team, don't burn them out unless its worth it for everyone. At the same time, don't let opportunities pass you by because you don't want to work nights and weekends.
  16. Ignore trends, listen to your customers pain (needs) instead.

Startup rules

Two really smart guys have posted their tips for starting up a new business. Read what Jason Calacanis and Mark Cuban have to say on this subject. Personally, I been part of about 5 or 6 startups including 2 that went public so I've got my own opinions. On the whole I agree with about half of either of those guys observations.

Jason is a guy who starts blogging companies for a living so buying Macs and a $5000 espresso machine might work for him but I think its just plain dumb for most business models. Mark starts and invests in varied technology businesses that he scales out rapidly in a hurry (or at least hopes to) so he's got a different spin that's a little closer to mine.

Myself, I tend (recently) to start 'old fashioned' profitable, private software start ups and I don't tend to sell them in any hurry.

I haven't thought of my rules yet but I will post them soon when I compile them. A lot will overlap with what Jason & Mark say.