Ask the Wizard

I’ve had a few questions recently from folks who have received first round financing term sheets in which the proposed board makeup seems over the top, from my perspective. Here is a composite (sorry, “mashup”) of the kind of first round term sheet language for Board participation I recently heard from different founders:

One CEO seat (currently founder X), two Series A investor seats, and and independent nominated by the Series A and approved by the board.

This is silly. A more cynical wizard (who would look like me but say “hmm” a lot more) might interpret this as early investors trying to take control of the company immediately. Can you spot the three things we don’t like about this proposed board structure?

First, “one CEO seat (currently founder X)”. That’s nice, founder X gets a board seat. How long does founder X have a board seat? Only as long as (s)he is the CEO. New CEO, new board member and out with founder X. No more founder board seats. Let’s move on to the other troubles before we re-draft the entire proposal.

Problemo numero dos, “Two Series A seats”. Um, I don’t get why the first round investors should get two seats. If the Series A is all being done by one institution, then this is particularly annoying, but even in the case of a syndicate, the series A investors should have a single representative on the board. “But but but”, you say. “Wait wait wait”, you say. “What if you really appreciate the input of two particular members of a syndicated financing?” Excellent point; the proposed board structure might include a board seat for the lead investor on the round, and board observation rights for one or more members of the syndicate.

Finally, and particularly the way this proposed board is structured, watch out for the wording on “an independent seat nominated by the Series A and approved by the board.” In this case, the Series A investor obviously controls the independent seat completely. This entrepreneur’s post-A round board, if accepted, is going to have 3 people representing the Series A and one CEO, who may or may not be the founder six months from now. This is, in legal parlance, “sucky”. If this is one investor doing the round, note that we might also raise our eyebrows and wonder why the institution’s partners have so much free time that two of them can take board seats in the same company.

Here’s a more straightforward Series A board structure: “One founder seat, one Series A seat, and an independent nominated by the founder and approved by unanimous consent of the board”. If you’re a multi-founder company, then I might change this to: “One founder seat (founder X), one CEO seat (currently held by founder Y), one Series A seat, and one independent nominated by the CEO and approved by unanimous consent of the board”. Frankly, you could keep it even more basic in the latter multi-founder case and just go with founder/founder & ceo/series A, but I personally enjoyed having an independent board member once we’d added one ourselves, and I think it’s helpful to get this person in sooner rather than later.

In the multi-founder case, when you do a 2nd round financing and you can keep the same general structure, you still have a nicely balanced board: something like two people from founder/management, two investors, and an independent. From here you can do things like layer in more independents as you grow, etc.

Rational investors are comfortable with these sorts of structures, and in fact, in our series B negotiation at FeedBurner, it was the investors who countered with “founder seat and ceo seat currently held by founder” when we originally redlined the first term sheet with two founder seats. This is a perfectly reasonable compromise in most cases and provides the investors with some security that a “renegade founder group” can’t hold management and investors hostage, while giving a strong founder group some assurance they will have significant and balanced participation in the board. There is no reason a founder should feel obligated to cede control of the company to a single investor on an early financing.

Posted by Dick at 11:01 AM | Permalink | Comments (4)

I got a package delivered to me from Moosejaw.com a couple weeks ago, and it reminded me of something I haven’t written about here yet, namely, how important it is for your company to have a specific voice. Here’s how the pre-printed paper note that was packed with my Moosejaw shipment starts out:

“If you are actually reading this note you should be super happy. First, you have received your order, reading is fun and getting something in the mail (even if you bought it yourself) has got to make the day better. Second, I put your order together all by myself.”

That’s a fun note to read. I like Moosejaw more because of that note. Is it silly? Sure, it’s a silly note and it’s pre-printed, so I know that everybody else gets one. Why does the note make me like Moosejaw more? People like it when companies have personalities. It makes us feel like there are actual people on the other side of the communication. It’s fun to be the customer of a company with a personality. This seems totally obvious, and yet you too rarely see companies with distinct personalities really grab your attention in the marketplace. Why is this? It’s actually hard to remove personality and character from communications. So, instead of saying that companies don’t take the time to have personalities, it’s probably more accurate to state that companies don’t allow themselves to show their personalities. I’m sure there are a few different reasons for this. First, it’s risky – what if people don’t “get” your personality. Second, it’s hard to maintain a personality as you grow and have a global audience (the http return code 404 in FeedBurner, for example, results in a page that says “There is no spoon”. This can be a bit challenging for those of us that have a hard time with English and/or technology). Third, and probably not to be underestimated, we have been brought up to think that business is serious, and that we have to be serious if we want to be taken seriously. As the saying goes, this is serious business. So, we (meaning you) spend lots and lots of time depersonalizing our corporate communications, because, you know, we can’t say that!. We write press releases that use approved emotions like “we are very excited to announce the release of…” instead of writing “It is with great fear and trepidation yet in some ways it is ultimately delightful for us to let you know we’re releasing …”, etc.

It is a competitive advantage for you to have a unique voice in your market. Companies with unique personalities give themselves a leg up because people want to embrace other people, and we all dislike antiseptic and bland corporate communications.

I should also point out that when I say it’s important to have a unique voice, I don’t mean that you have to make sure people think your company is fun and cool. Your company voice can be serious or esoteric and still your customers will appreciate you for having a unique voice.

The time when it’s easiest to embrace your company’s voice is of course when you’re a startup, but even larger companies should be allowing themselves to have a unique voice. Recently, a number of Apple press releases have given the sense that Steve Jobs wrote the release himself (and that he had to tell a number of people in corporate communications that yes, dammit, I really do want to say that. It would be absolutely fantastic if he had no hand in these releases!). You never get such a sense when you read a Lucent press release; they all sound exactly the same. I bet it also takes longer to write a Lucent press release because a lot of people have to make sure it scores 100 on the dehumanizer before it can be released. I pick on Lucent because I used to own the stock and actually waded through some of the releases, but you could look at 95% of the public company press releases out there and draw the same conclusions. Why the heck did I used to own Lucent stock? Um, I made some mistakes in my youth, and then I made a lot more mistakes in my not youth.

Don’t talk to your customers the way most Fortune 500 companies talk to their customers. Your customers want to like you. Your employees want to like the company they work for. Communicate with your customers and the marketplace in a way that makes them feel closer to you, and the way you do that is by allowing your company to have a voice.

Note that having a company blog is not a checkmark that equates to having a company voice. Company blogs are great, and I can think of very few companies that shouldn’t be blogging. Your voice, however, has to be everywhere your company interacts with the market and customers. It’s more than the brand, it’s all your communications, including customer service responses and presentations that employees give at conferences.

Post-Script: I think I’m slowly going insane because the structure and grammar of my posts seems to get progressively worse. It’s like I’m the lead character in Flowers for Algernon and the brain surgery is wearing off. Soon I’ll be writing in all consonants and uploading pencil sketches.

Posted by Dick at 11:13 PM | Permalink | Comments (5)