Archive for November, 2008

How to (and how not to) Break Bad News

November 25th, 2008

I have been a micro-lender to Kiva.org (nano-lender might a more accurate description of the loans I have made) since I met and was inspired by co-founder Matt Flannery a couple years ago.

I have made a couple of loans in that period, all of which were paid back quietly and timely.  I got updates on the borrower‘s businesses and it seemed like the loans had helped the borrowers a lot.  So far so good.

I got an email this evening regarding my most recent loan, which was partially repaid several months ago, but has been quiet for a long time.  The message said:

After detailed investigation by Kiva representatives, our team has determined that further repayments on your loan are highly unlikely.

The message goes on to say that 95% of Kiva loans are repaid.  Default on this loan doesn’t bother me much and I will continue to lend through Kiva.

What I liked about the message was it simple directness.  It didn’t try to sugarcoat the message.  It just came out and said “it didn’t work”.

At the same time, I had to click a link in the email to get all the facts.  In this case it was not that the entrepreneur I lent money to went out of business, but that the field partner they worked with in the country had systematically over-requested loans and kept some of the cash for itself.

This is a more serious problem for Kiva.  I really appreciate their candor in telling me I am not likely to get my money back, but if I hadn’t clicked through I would have gotten a completely different view of the problem.

I don’t mean to bash Kiva here.  They do fantastic work.  Still, the way to deal with setbacks in my book is to acknowledge them and let people know how you are going to avoid them happening again (note- this applies to multinational banking companies as well as microlenders).  I have definitely had my share of errors and setbacks, and I have found that the best way to deal with them by far has always been to address them promptly, fully and with a solution in hand.

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Microblogging and Effective Communcation Methods in the Enterprise

November 23rd, 2008

I have been on Twitter for about 18 months now and continually marvel at how it has helped me connect and re-connect with people I see infrequently.  I joined my new law firm, Virtual Law Partners, in August of this year and Yammer launched shortly thereafter.  VLP has no offices, so there is no water cooler around which people can congregate and socialize.  I created a Yammer network for VLP in the hope that it could serve that purpose virtually.

After two months on the network we have 20 members and I have posted 153 times.  The next-most frequent members have posted 60, 30 and 6 times, respectively.  It is fair to say that the idea of network was well received, but the network itself has not been overwhelmingly popular to date.  This is a data point for me rather than a success/fail metric.

We are a completely virtual business, and also a brand new, rapidly growing organization. We are going to try a lot of different communication methods before we find ones that work best, and we will probably find that different people have different favorites.  The NY Times has these quotes that for me encapsulate the appeal of microblogging- it can be pithy and valuable for both business and social matters:

“I’m personally learning about things I wouldn’t normally hear about until we’re getting ready for a monthly board meeting,” he said. His company, with offices on both coasts and soon in London, uses Yammer. “I’m constantly sending messages about what I’m doing,” he said. “The rest of the company gets excited, and they’re using that info to communicate with customers and partners.”

Companies with many employees who work from home or in far-flung offices may get the most out of internal microblogging, which can help fill the inherent social gaps among remote workers. Even simple updates like, “Going to the dentist” or “Mopping coffee off the keyboard” can make co-workers feel more connected to one another.

It isn’t for everyone, though, and never will be.  We have a host of other online tools to communicate intra-firm: IM, discussion board, internal blogs, phones(!) and a nascent social network.  I can’t wait to see how people use all these tools.  They each have their own set of benefits and drawbacks.  We are in the throw-things-at-the-wall-and-see-what sticks-phase. I bet that over time we will start using things in ways no one ever expected.

As a social web nerd, I really enjoy watching the process unfold.  VLP is a brand-new firm with a plan to do something no one else has done before in any industry: build a major business with no offices at all.  Communication is even more critical for us than for many other businesses.  I am really looking forward to seeing what works and what doesn’t over the next year or two.

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Reblog Flowing Data: US Oil Doesn’t Come From Where You Think it Does

November 21st, 2008

Flowing Data has a map graphic this morning that makes two great points.

US Oil Doesn’t Come From Where You Think it Does | FlowingData

First is that most US oil comes not from the Middle East but from Canada.  Did you know that?  It may not be a geopolitical bombshell but it’s a fascinating tidbit nonetheless.

The second point is how easy it can be to find data, chart it and publish it on the web.  The post says the map came from Department of Energy data that one person dropped into an online database and cranked out into a map.  Good stuff- go web!

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Legal Marketing with a Big Upside for Startups: FreeTrademarksForStartups.com

November 19th, 2008

This is not my marketing concept, though I wish I had thought of it.  Trademark lawyer and Red Sox diehard Erik J. Heels has a new initiative to help startups understand and protect their trademark rights.

FreeTrademarksForStartups.com: Free Trademarks For Startups » @ErikJHeels

If your company is a bona fide startup, Erik will help you file a trademark application for free.  He is up front about the fact that he is doing this to get your future paying business as well, which sounds entirely reasonable to me. 

If you have a startup and need help evaluating your preferred trademarks and filing an application, go check Erik out.

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Reblog NY Times – Steps in the Search for Rewarding Work

November 15th, 2008

I love my work.  It can be stressful, demanding and sometimes the nuts and bolts overwhelm the feeling that I make a difference.  This article from today’s New York Times is a good reminder of what to focus on during the tough times.  Here are a couple of good quotes:

“We found that people working in very challenging professions or settings who were technically excellent might find their work difficult unless it was also important to their mission in life,” Mr. Gardner said. An unexpected finding was that joy was a crucial ingredient of good work. Mr. Gardner said: “Take teachers in American inner cities. They may be good technically and feel deeply about their responsibility to their students. But if they don’t find joy in their work, they burn out; it’s just too hard. You have to build into hard jobs like that supports and rewards, so that what was initially meaningful and engaging will continue to be so.”

——

There are, Mr. Gardner said, three questions people can ask about their jobs to evaluate their good-work level: Does it fit your values? Does it evoke excellence; are you highly competent and effective at what you do? Does it bring you that subjective barometer of engagement, joy?

Preoccupations – Steps in the Search for Rewarding Work – NYTimes.com

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Reblog On Startups: Startup Salary Data from Private Company Compensation Survey

November 14th, 2008

Dharmesh Shah is an entrepreneur in Boston with lots of helpful information to share among startups. Today he posted some tidbits from a survey on the always fascinating topic of founder compensation.  How much do founders make at various stage of a company’s existence?  How long do they typically remain CEO?  How much equity does an incoming non-founder normally get?  How much equity does a founder retain in a company’s later stages?

Startup Salary Data from Private Company Compensation Survey

The comments on Dharmesh’s post are full of interesting data as well.

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Frank Herbert, Douglas Adams and the Economy

November 12th, 2008

Two of my favorite books as a teenager were Dune and the Hitchhiker’s Guide to the Galaxy.  These quotes from those books have been bouncing around my brain lately:

Dune – Fear is the Mindkiller (the complete Litany Against Fear is here)


Image courtesy jamesbelieves.blogspot.com

Hitchhiker’s Guide – Don’t Panic

Image courtesy http://en.wikipedia.org/wiki/Image:Towelday-Innsbruck.jpg
Image courtesy of Wikipedia

I have been repeating these phrases to myself a lot recently.  Unstable economies are scary times, but energy spent being anxious and stressed is just wasted energy.  Some days I can’t get on top of the stress and end up completely exhausted, but unless I managed to do something productive in spite of my stress I am no better off.

In that vein, here is an article about strategies for getting past the anxiety and focusing on things you can control.

In the Hunt – Recession Advice for Entrepreneurs – Stay Calm – NYTimes.com

Acknowledge the anxiety, then focus past it on steps you can take to make yourself feel like you are moving toward your goals every day.  Good advice.

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What Happens to Preferred Stock When Your Company is Sold

November 11th, 2008

The phrase in the title of this blog showed up recently in my Lijit search results and it is a great question.  The way preferred stock clauses play out is not totally obvious, either, so here is my summary of the basic principles.  For simplicity, let’s assume these basic facts:

*1M shares of common stock have been issued to founders; and
*A $1M investment at $1.00 per share, meaning 1M new shares are sold and investors own 50% of the company.

Liquidation Preference
Preferred stock has rights that stand ahead of common stock.  The most basic of these (and the only one I will focus on) is the liquidation preference, meaning the amount of money each share of preferred stock will receive if a company is sold or liquidated. This amount is paid to the preferred stock holders before the common stock (founders and employees) gets any money.

The amount of the preference can be negotiated.  At a minimum the preference will be the amount paid, $1 in our example, so that investors know they will get their money back before anything goes to holders of common stock.  I.e. if the company is sold for only $1M the investors get their money back (ignoring any debt, attorney fees, etc.) and common stock holders get nothing.

If investors think the deal is risky they may demand more than a 1x preference.  Liquidation multiples of 2x or more are more common when times are tough and money scarce.  With a 2x liquidation preference our investors would get paid $2.00 for every $1.00 they invested before any money goes to the common stock.  This means the company needs to sell for over $2M before the common stock gets anything out of it.

Participating Preferred
The next question is what happens after the preference amount is paid.  In our 1x preference scenario with a $2M sale the preferred stock gets the first $1M.  What happens to the other $1M?

It depends whether the preferred stock is “participating” or “non-participating”.  Participating preferred splits the remaining $1M with the common stock and non-participating lets the common stock take the full amount.  Clearly, common stock holders would rather see the preferred not participate, while participation is a better deal for the investors.

But What Happens if the Company Sells for a Lot of Money?
These scenarios all assume our company is sold for a relatively small amount of money and show how investors would get their money back when the total payout is small.  What happens if a company hits a home run, e.g. if our company sells for $50M?

Following the rules above, here are some possible outcomes:

$1 preference, non-participating:  $1M to investors, $49M to common
$2 preference, non-participating:  $2M to investors, $48M to common
$1 preference, participating:  $1M preference + 1/2 of remainder = $25.5M investors, $24.5M common

The participation right makes a big difference, as we can see. (and note that the amount of participation can be limited as well, e.g. so that preferred stock gets its preference, $10M based on participation, and then the rest goes to common)

Conversion to Common Stock
The last thing to keep in mind is that preferred stock holders can always convert to common.  So for example, in the two non-participating examples just above the preferred stock would lose out if they only got paid their preference amounts.  Instead, they could forgo the preference, convert to common and share in the sale proceeds based on their percentage ownership of the company.  This would net the investors 50% of the sale proceeds in our example.

Which Leads to Percentage Ownership
The last (obvious) point is that percentage ownership matters.  A 10% owner nets a much lower return than a 50% owner.  This basic fact goes a long way toward explaining why valuations plummet in down markets- investors value the company lower so they can get a bigger percentage for the same amount of cash, and this lets them still make a decent return even if the company sells for a low price.

Wrapping Up
The bottom line is that in almost every situation there is a company sale amount below which the investors are better off staying as preferred stock (this is generally downside protection against low-sale price outcomes) and above which the investors are better off converting to common.  The main variables are the total sale price, amount of the preference, participation/non-participation (and any caps on participation) and the percentage of the company investors would own after conversion.  You can be sure your investors will be doing this math, so you should learn how to work through it as well.

And that’s what happens to preferred stock when a company is sold.

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Quote of the Day – On Bicycle-Sharing Systems

November 9th, 2008

The New York Times has an article today about bicycle-sharing programs in major European cities.  Here’s a gem of a quote about the civic benefit, earned on top of environmental improvements:

“The critical mass of bikes on the road has pacified traffic,” said Gilles Vesco, vice mayor in charge of the program in Lyon. “Now, the street belongs to everybody and needs to be better shared. It has become a more convivial public space.”

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Someone Actually Fired over Facebook Photos

November 7th, 2008

I regularly hear people worry about the lack of privacy on social networks, that notes or photos posted for a group of friends are not private and that sooner or later someone was going to lose a job over it.

Until today I had never actually heard of it happening.  Former New England Patriots cheerleader Caitlin Davis was fired this week for photos posted on her Facebook page.

The photos show her and a friend using markers to graffiti a passed-out-drunk person at a party.  The graffiti apparently included the words “penis”, “I’m a Jew” and a pair of swastikas.

Davis’s conduct is obviously offensive and inappropriate.  It is remarkable that she would compound that stupidity both by allowing photos of the activity to be taken, and then letting them be posted to her Facebook profile- or anywhere else.

The only positive element in this whole story is that I now have a very memorable example to offer people of how not to behave online.  There is no privacy on social networks.  End of story.

[N.B. I haven’t spent a whole lot of time reviewing this story. From what I can tell no one has accused Davis of writing anti-Semitic graffiti, just of being dumb enough to associate herself with it. Either way, it was enough to get her fired.  Lesson learned, I hope. ]

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