Bootstrapper.com - Confessions of Serial Entrepreneurs

So today’s post is very important because many people will disagree with it. If you are an entrepreneur, the cash equity you invest in your company is worthless in the eyes of VC’s. Sure, they will bitch about having skin in the game but it will not change your terms or valuation. Your investment will be looked as necessary seed money to get to that point and not as anything more. Yes, I have seen plenty of entrepreneurs investing alongside VC’s their own cash but at the end of the day, they are putting as much in as the follow on investors and thus are still their investors bitches, whether they started the company with $1 or $1,000,000. I’m sure many will disagree with me but when push comes to shove Bootstrapping is looked at with respect and just as valued as putting cash in. So if you’re an entrepreneur and deciding between pumping in a big chunk of cash or funding ad-hoc. Fund ad-hoc, it will save you cash personally and likely have the same valuation on your equity at the end of the day.

A friend of mine Allan Young, who was a cofounder of the University Venture Fund says “I think good entrepreneurs are going that way. put as little personal money in as possible. no middle ground basically, bootstrap or raise “hella” money so you can staff up and market big - the middle ground is dangerous because you give up too much anyway and you don’t really get enough resources to go to war with…bootstrapping instills a lot of discipline that most guys aren’t cut out for.” I happen to agree.

But the fundamental problem is a pricing issue. Personal investments are simply not properly valued by the next round. This is especially true in a place like NYC where there is a limited number of investors and relatively standard investing approaches. It simply does not pay for an entrepreneur to put in $100k when he can put in

PS. Yes, you can invest money as debt into the company but you gotta be friggin crazy if you think you’re getting it out anywhere but at the very end of the line. It works out the same way, save your money. Bootstrap.

One of the most important things for an entrepreneur to consider and probably the last thing on the list of what an entrepreneur actually considers is lawyers. Why? Entrepreneurs (my old self included) always think they can write their own contracts and that they are legal beagles. Now let me ask you a question my fellow entrepreneur. Say you had a beagle, they are very cute doggies btw, would you lick your dog clean so he doesn’t have to? Now, if you said, yes, PLEASE DON’T tell me you do, but if you are normal, the answer is no.

So why would you want to do your own legal work? It’s not your specialty. NOw finding a great lawyer is tough and they are expensive. That’s why you should try to become friends with a great lawyer and get him or her to believe in your ideas and then give you discounted legal services for equity.

Now you’re probably saying “give my lawyer equity!!!!” you’re an idiot. Well, while I may very well be an idiot, there are very specific reasons why you’d want to give your lawyer equity.

1) You are a tiny client of his, this is a motivator to get him to do extra specially hard work for you. None of his big clients offers him equity.

2) Now he’s a shareholder and actually cares.

3) The most important thing you’ll ever do if you are looking for an exit is paperwork. Whether it’s a term sheet or a sale agreement or filing for an IPO. There are a million ways in these agreements for an entrepreneur to get fucked. You want a lawyer that will rip the other side in half with a smile. An entrepreneur negotiating hard may piss off an investor and get an investor to think “he’s being a greedy bastard” and walk away. A lawyer negotiating hard is expected and the investor or buyer may come to you, to try to “settle this thing” and get it over with. Then the investor or buyer is playing into your hands. You just turned a weakness (having to negotiate) into a strength (getting them to come to you to negotiate with you). All because you had a shark of a lawyer. Also, if you 10 entrepreneur, I guarantee you’ll find at least 5 who hated their VC’s and feel like they’ve gotten fucked. Ask those people if they feel they had good lawyers. Case Closed.

PS. How do you find a good lawyer? Networking, or ask me!

This is why you’re friend whose company just sold for $50MM to Cisco is asking you for a loan.

The average company takes 5 years concept to exit.

The average company has 3 founders.
By the time a company gets past its Series C round, the average founders group has a total of 15% of the stock or 5% per founder.

The company sells for $50MM.

The founder has never taken a penny out besides his $100,000 salary. Meanwhile he gave up a $250,000 a year cushy job to start the company.

The founders take is only $2.5MM.

After Capital Gains Tax say he has $1.9MM left.

Now let’s take out $700,000 for paying off the mortgage he couldn’t afford. He’s left with $1.2MM. Still not bad.

Now let’s pay off the Ferrari and the Wifes S500. Down to a cool million.

Now let’s put $200k in the kids college fund: $800,000

Now he probably owes a lot of favors - so lets write off $250,000 in bad investments (I’m being generous) $550,000.

Now there’s vacations and spending: Down to $450,000

Now he’s bored and has ADD. None of his initial ideas will be successful because their done for the wrong reasons. Now we’re down to $200,000

Now he pays off his student loans (finally - the Ferrari of course was more important before), down to $100,000

$100,000 = that is all your friend the dot com millionaire has in the bank for 5 years of work.

You make $250,000. Sock away $100,000. You know tech and have the time to invest, you earn 25% a year, You sock away $125,000 - in 5 years you’ve put away $600,000, paid off your house and cars, worked half as many hours and had 1/1000 the stress of your friend the founder.

Whose worth more? You are and you’re at the same cushy job he walked away from 5 years ago.

This is why serial entrepreneurs never have enough cash. They’ve been nickeled and dime’d to death.

The only people that cash in are people that have taken companies public or people that have been smart enough to sell shit for gold (Mark Cuban, Geocities guys, linkexchange guy etc….)

But i leave with one final question: Whose happier? The nearly broke founder or you, who has 5X as much cash in the bank as the founder?

The Founder because he loves it and is living the dream.

So i get asked all the time to be partners in businesses. It’s funny but people I’ve never met and people I just meet offer me half of their companies all the time. I wouldn’t offer myself half of my company but go figure. Of course, I turn everyone down unless I know them or they come from a personal referral. In addition, when I accept equity, I never take a full share even if its offered. Now, you’re probably saying “why would this idiot leave money on the table?”

It’s pretty simple, my role is to play architect. Once the startup is up and running my role is just occasional strategy and biz dev intros. It’s not heavy lifting and i’m not deeply involved. If i accepted a full stake, the entrepreneur would thank me for the first 3 months and then hate my guts and think i’m a greedy bastard for taking half and not doing work anymore. It is irrelevant if they were the ones that offered that to me in the first place and it does not matter if i carefully explained what I do. I would much rather collect smaller stakes in happy companies than largest stakes in unhappy ones. Considering most of the work I’m getting equity for, I would probably do for free just if they asked, I consider it a blessing so I try to be nice.

This can be extrapolated to investors. A lot of times investors try to get as much as possible. This isn’t always the best thing to do. Even if your founder is an arrogant prick, you still want him involved, maybe not as CEO but it really is never smart to get rid of the energy that started the company 100%….okay maybe sometimes but in general you want the guy or gal around. Usually the founder is a horrible CEO but could be a great innovator. The innovator is more important long term so I caution investors out there to be fair with your terms and equity because even if an entrepreneur says thank you, they may still hate your guts.