Venture capital is commonly perceived as a integral component of the whole startup process.  We presume that startups typically go through at least one round — and probably several rounds — of VC funding as they grow.  This orientation towards outside investment affects the whole entrepreneurship ecology: for example, university-based entrepreneurial competitions — including MIT’s — get a significant proportion of their overall support from VC firms: VC firms supply speakers, mentors, judges, and sponsorship.  As such, we write our business plans, develop our business strategy, and pitch our ideas with an orientation towards soliciting VC investment.  Once launched, we set subsequent business milestones with additional VC funding rounds in mind.  The overall sense is that our path to success invariably leads through VC participation at multiple junctures.

However, in a report published last June, Paul Kedrosky at the Kauffman Foundation studied the 900 unique companies in the Inc. 500 list of fastest-growing companies over a ten-year period.  He concluded that only 16% of the companies had any outside investment. That seems like a very low percentage.

Granted, you could argue with the validity of the sample used in the study: the Inc. 500 list isn’t perfect.  E.g.: because the companies are privately held they’re largely self reporting, so independent verification of their revenue might be difficult. Also, Inc’s “fastest-growing” criteria may favor companies that start from a very small capital base atypical with outside investment.

But even if the report’s off by a factor of 2, it still means that the majority of companies the Inc. 500 list succeed without outside investment.  That’s a surprising result: what are the implications?

- Perhaps the best ideas can be bootstrapped: maybe a much smaller subset of ideas require outside investment to succeed than we’ve thought.  Sure, they may take longer to emerge as dominant, world-beating companies, but in the meantime they build a solid foundation on which to grow.

- Perhaps business plans should be oriented to be more of an operations document than a sales document designed to procure outside investment.  Business plan financials are often tailored to appeal to investors looking for quick returns — as opposed to showing how the company’s founders can use capital efficiently to sustain steady, managed growth.

- Perhaps VC funding encourages excessive risk taking across the board, leading to ineffective use of a startup’s energy, not to mention being an inefficient use of the capital stewarded by VC firms.

Focusing on pursuing and taking outside investment puts a venture on a very steep trajectory — for success, or for failure. Maybe the companies that make the Inc. 500 have adopted a more moderated approach that leads to more consistent results (For example: weren’t we always told to focus on servicing customers’ needs first and foremost?)  Having a business idea vetted by outsiders is always good, but should it be so strongly oriented towards outside investment? Is it possible that the added rigor of figuring out how to bootstrap a company improves it — and its chances of long-term success?

(You can download the .pdf Kauffman report in its entirety here: http://www.kauffman.org/newsroom/venture-capital-industry-must-shrink-to-be-an-economic-force-kauffman-foundation-study-finds.aspx)

Have feedback on this post?  An idea for a follow-on post?  Comment below or email me at: peter at alum.mit.edu.

Peter Mui is founder of the MIT Entrepreneurs Club and co-founder of the MIT $10K Entrepreneurial Competition. He’s been involved in numerous startups, taught entrepreneurship at UCSF, and has judged business plans and mentored teams at MIT, UCSF, UC Berkeley, UC Davis, University of San Francisco and Babson College.

The Business Plan Contest (BPC) is the capstone event and competition namesake of the student-run MIT $100K Entrepreneurship Competition, where one promising team of entrepreneurs is awarded $100,000 cash along with a host of in-kind services.  The competition serves as a platform for communicating innovative business ideas, developing skills through mentorship and networking, and presenting prize money to jump-start businesses.

The MIT $100K embodies the entrepreneurial culture at the university as a whole, which has made a significant impact on the world.  In a study released by the Kauffman Foundation last year, it cited that the combined revenues of all the active companies founded by MIT alumni could be the seventeenth-largest economy in the world, just ahead of Turkey.

The MIT $100K kicked off its Finale event with a declaration of “MIT Entrepreneurial Day” by Gregory Bialecki, the Massachusetts Secretary of Housing and Economic Development.  This year’s theme, “Before and After,” reflects on MIT $100K companies from years past including Harmonix, creators of Rock Band, and internet hosting company Akamai (NASDAQ: AKAM). It also highlights the road ahead and future, game-changing ideas that will emerge from the MIT $100K. Reebok founder and former CEO Paul Fireman served as the key note speaker, encouraging aspiring entrepreneurs to use communication as the key tool in starting and growing a successful venture.

C-Crete Wins MIT $100K Grand Prize

This year’s grand prize winner highlights the emphasis placed on eco-friendly, energy efficient solutions.  The 2010 MIT $100K Grand Prize was awarded to MIT graduate student Rouzbeh Shahsavari for C-Crete Technologies, maker of a nanoengineered cement that reduces CO2 emissions and is stronger than any currently existing cement

C-Crete is no stranger to MIT $100K success.  Back in October, C-Crete won the MIT $100K elevator pitch contest, taking home $5,000.  They then participated in the Executive Summary Contest where they went on to become a finalist.  In total, C-Crete has won $106,000 this academic year through the MIT $100K.

Using MIT $100K alumni company PollEverywhere, the audience was asked to pick a favorite team after listening to 3-minute pitches from all six finalists.  The audience chose Aukera Therapeutics, which is developing a novel protein therapy to treat ALS.  Aukera Therapeutics took home $10,000 as the Audience Choice winner.

MIT $100K Goes Viral with Twitch Contest

Perhaps one of the most entertaining moments of the night was the award of the first Twitch (or Twitter pitch) contest winner.  Contestants were challenged to communicate their business idea via Twitter and solicit as many re-tweets which served as votes.  This contest explored the notion of virality in social media and reached almost 300,000 people.

The $500 prize went to Jia Ji and his company, couchange.org (pronounced Couch-Change).  Couchange’s business, which focuses on donating unused gift card balances to charities, had been eliminated in previous rounds but the team was determined to get stage time at the Business Plan Contest.   Their tactic during the contest was to ask the Twitter community to include a “vote” for their favorite charity as they re-tweeted the Couchange “Twitch”.  The winning charity would then receive the full $500 prize if Couchange won.  When approaching the stage, Jia immediately asserted that he is personally matching their winnings and donating a total of $1,000 to the charity that received the most votes, DreamCorps. This act alone will keep a school library in rural China operating for one year.

Jia then challenged the high net-worth individuals to also contribute, quipping, “I’m looking at you, Mr. Billionaire,” directed towards Fireman. He accepted the challenge when returning to the stage to present C-Crete with their grand prize and announced to the crowd that he would personally donate $19K to Dreamcorps, an act that will keep the library running for 20 years.

Track Finalists Honored

In addition to the $100K grand prize, finalists were awarded $20,000 in seed money. They are:

• Life Sciences – Aukera Therapeutics- ALS is a rare but devastating neurodegenerative disease that is rapidly progressive and invariably fatal. There is only one FDA approved drug for ALS which extends life only 2-3 months. ALS patients are deficient in Angiogenin, a naturally occurring protein, and mouse studies have shown statistically significant efficacy with systemic delivery.

• Mobile – Lark Technologies- By combining sophisticated user-centric product design, applying cutting edge sleep science, and harnessing the power of smart phones, Lark Technologies provides compelling nonmedical solutions around optimizing sleep to make both people wake refreshed. The company’s flagship product, Lark, is a silent waking system for busy professionals with different sleep schedules.
  .

• Web/IT- KarDo- Computer users regularly run into a task they don’t know how to perform.  For each of these tasks, there are many users on the Internet who know how to perform it.  With KarDo, the knowledgeable user performs the task, and KarDo records this and uploads it to a website.  Later, another user can just download and replay this to perform the task.

• Energy- C-Crete Technologies- a nanoengineered formula for creating concrete stronger and cheaper than existing concrete while also decreasing carbon emissions.

• Development- SolSource Energies. SolSource Energies is a novel device that harnesses solar energy for portable cooking, heating and electricity generation. In addition to meeting more energy needs, it combats indoor air pollution and is designed specifically for the practical considerations of life in regions of the world where polluting fuels are currently the only feasible option.

• Product and Services – Privo Technologies - Nanotechnology based chewing gums for controlled delivery of insulin. We have the ability to control the release of agents mixed in to our formulations. Whether the agent is an energy supplement, pain killer, or mint flavored gel, it will be accurately released using our innovative delivery system.

Looking Ahead

The MIT $100K organizing committee is beginning its search for a select number of corporate-level partner sponsors, relevant competition judges and team mentors, and spirited entrepreneurs who would like to join the greatest business plan competition in the world.

The MIT $100K thanks its current sponsors for their support:  Brown Rudnick LLP; Morse, Barnes-Brown & Pendelton PC; AngeLab Ventures; Citrix Systems; Foley Hoag LLP; KPMG; Mintz Levin; Polaris; WilmerHale; Wolf Greenfield; Faber Daeufer & Rosenberg PC; Google Ventures; The Gary Karlin Michelson MD Charitable Foundation; Reliance Venture Asset Management; Lemelson-MIT program; Massachusetts Life Sciences Center; Novaris Venture Funds; Phillips Lifestyle Incubators; Microsoft; Cambridge Innovation Center; Version 2.0 Communications; Fresh-Tilled Soil and the Wall Street Journal.

For more information, please visit http://www.mit100k.org or contact:

Anne Wang, MIT $100K Marketing Director

aawang@mit.edu

Sexy Pitch

Lyrics:

Levant!

1.  Capitalization, and

2.  Intellectual Property.

The consequences of getting either of these things wrong can be disastrous.  Today, we’ll look at the first issue: Capitalization.  Specifically, we’ll look at some things that can, and too often do, go wrong in the issuance of equity to founders when forming a new company.

(1) Allocation of Founders’ Shares

There are several issues related to founding a company that, while simple, can be quite counter-intuitive.  This is the first such issue: Splitting-up the company evenly (e.g., 4 founders each get 25%) can be poisonous for camaraderie and productivity.  Founders’ contributions will never be exactly equal (especially among 3 or more founders).  There’s nothing wrong with such inequality, but the split of equity should reflect the relative importance of the contributions being made and that are expected to be made into the future.  Otherwise, the most significant contributor will soon find herself: (1) resenting the other founders, (2) slacking off until she feels she’s getting her fair share and/or (3) asking for more of the company, upsetting the other founders.

(2) Promising an Ownership Percentage of the Company

When allocating ownership in a company, never promise someone that they will own X%.  Always talk in terms of the number of shares they will receive.  The risk is that the person may mistakenly believe that he is entitled to maintain his X% of the company indefinitely even as new people acquire securities in the company.  Trust me, this happens.  When new people acquire ownership, everyone gets diluted.  Hopefully, the new equity holders will bring more value to the company, so the value of everyone’s holdings can continue to grow.

(3) No Vesting

Perhaps the most counter-intuitive issue you’ll face when forming a company is the concept of vesting.  If you are launching a new company, why would you ever agree that part of the company that YOU just formed could later be taken away from you?  Three reasons: (1) You want to attract investors, and because investors are largely investing in you, they will demand that your shares be subject to vesting.  (2) You want the other founders to be subject to vesting, which incentivizes them to continue to add value to the company; you don’t want your co-founders to walk away with their shares while you stay behind to do all the work.  (3) You want to establish a precedent for your employees, who should all be subject to vesting.  It’s an easy sell if you can tell them, “I did this.  Your turn.”

(4) Acceleration of Vesting

It is understandable that new entrepreneurs usually expect that if they are fired from the company they created, without a good reason, they should keep all of their shares (i.e., their vesting should accelerate); or if their company is sold before they are fully vested, they expect to get a full cash out.  Unfortunately, many founders have learned the hard way that (1) the best way to keep everyone working hard and building value is for no one at the company to have vesting accelerate merely upon termination of employment and (2) the best way to sell a company for a large return is if there is little or no acceleration of vesting following a sale.  In the context of a sale, acceleration can reduce the value of the business in the eyes of the buyer (e.g., if the key employees will not have vesting incentives post-closing).  Nevertheless, some acceleration of vesting may be acceptable to investors and buyers, depending on the circumstances.  You may have heard of “double-trigger” (acceleration of vesting upon (1) termination without cause after (2) a sale of the company), for example.  In some situations, this can be a fair compromise to protect a founder while preserving the value of the company.

(5) Failure to File an 83(b) Election

Hopefully, you are convinced that it will generally make sense to subject the shares in your new company to vesting.  The next step is to make sure you don’t make a disastrous tax mistake.  When you buy those shares for fair market value, you have 30-days to make the biggest no-brainer tax election with the IRS.  An 83(b) election is an election to be taxed on the fair market value of the shares (less the amount you paid) at the time you acquire them.  Since the value of the shares in this new company should be nominal at the formation stage, you can likely afford to pay fair market value for the shares, in which case your 83(b) election means you pay $0 in tax.  Plus, your capital gains clock starts when you purchase your shares and there are no additional taxes until you dispose of the shares. Win-win-win!  If you fail, or choose not to file, an 83(b) election, you will need to pay tax on the fair market value of the shares (less your original purchase price) as the shares vest.  The amount of that tax is not only variable and unpredictable, if your company is successful, it can be quite high, and you may have no liquidity available to satisfy the tax if the company remains private.

(6) Securities Laws

For an attorney that is experienced with these issues, the issuance of founder’s shares is relatively easy to reconcile with state and federal securities laws.  Nevertheless, getting this wrong could create serious problems down the road.  A good business lawyer can easily help you navigate these waters.

(7) Managing Your Lawyers

As you can see, there are enough potential trip wires in forming a company, that an experienced business lawyer can be an essential advisor.  Forming a company with the right business lawyer should be a quick, efficient, educational and simple process.  Occasionally, however, founder negotiations will get “over-lawyered,” with each founder represented by separate counsel and unusual terms negotiated among the various parties.  That’s the wrong platform from which to launch a company.  For positioning with future employees, investors, lenders and acquirers, you want simple, standard legal documents.  Legal documents will not make your company grow, but they can inhibit its growth.

Lee Schindler is a business attorney with the WilmerHale Venture Group.  Based in the Waltham, Massachusetts office of WilmerHale, an international firm with over 1,000 attorneys, the Venture Group provides the legal guidance emerging companies need to go from start-up to venture capital financing, through IPO and beyond.

Mr. Schindler represents private and public companies in technology and life sciences. He advises clients with regard to formation, equity and compensation, seed financings, early- and late-stage venture capital financings, securities law compliance, mergers and acquisitions and public offerings.

A Peak Behind Closed Curtains – What Are MIT $100K Judges Looking For?

We often get asked for a checklist of items that teams should include in their business plan. There is no formal checklist that the judges are required to evaluate the plans against, and when every plan starts to look the same we notice the judges’ eyes start to glaze over.

That said, there are certain components of business plans that judges seem to notice if they are missing. The following list of topics adapted from Howard Andersen’s New Enterprise class at MIT Sloan is as good a checklist as any I’ve seen. In my experience teams should strive to generate something that feels unique and appropriate to their idea and not try to answer every question below. Teams should, however, make sure to clearly hit each overall topic somewhere in their plan and address the questions that are important to their business.

1) Market opportunity

• How much is being spent currently on the class of products and services you play in?
• How is that spending changing over time?
• What problem will your company tackle?
• Why is there value in addressing that problem?
• What will drive your growth (the market growing or a shift from one type of solution to another)? Remember that doing nothing may be the current “solution” to the problem you are solving?
• How is the market segmented? What segment are you targeting?
• What about competitors? Who are they and how will you address them?

2) Marketing strategy

• How will you make customers aware of your offering?
• Why is this approach appropriate to your offering and your market?
• How will you price? What is the justification for this approach?
• What types of advertising and promotion will you pursue?

3) Sales strategy

• How will you makes sales and distribute your offering?
• How do you expect this approach to change over time?
• Are there any special needs for selling your product (e.g. it’s perishable)?
• What is the value chain for distribution of your product and where do you fit into it?

4) Product description

• What is your offering?
• How does it work?
• What makes it unique?
• How will you protect it (e.g. patents)?
• What are the risks associated with building it (e.g. technical risks)?

5) Financial projections

• What is the projected revenue and income for the next five years?
• How do the cost projections support the approach you have outlined in prior sections?
• Are the revenue projections bounded by some semblance of reality?

6) Financing needed and planned exit

• Is the level of financing needed appropriate to the return (e.g. $20M to generate a <$10M business would not seem appropriate to an investor)?
• Does the business have a reasonable understanding of potential paths the business could pursue?

7) Team biographies

• Does the team have the right set of skills for the problem?

Miro Kazakoff is the Judging Co-lead of the 2010 MIT $100K Business Plan Competition. He has observed 15 hours of contest judging and read over 300 business plans and executive summaries. After all that, he is honored and sometimes a little surprised that our judges are so giving of their time and expertise.

Term Sheets: Six to One, Half a Dozen to the Other

Here is my list of half a dozen things not to negotiate (much) over:

(1)  Voting Rights. Here is a mistake the VCs made a few times way back in the dawn of time, and now they don’t make the mistake any more. Under Delaware law, unless your certificate of incorporation provides otherwise, you need the vote of the holders of common stock, voting separately as a class, to increase the authorized stock of the company. Without this provision, the common have veto rights over all sorts of things, including additional financing. Here is the provision:

The Company’s Certificate of Incorporation will provide that the number of authorized shares of Common Stock may be increased or decreased with the approval of a majority of the Preferred and Common Stock, voting together as a single class, and without a separate class vote by the Common Stock, irrespective of the provisions of Section 242(b)(2) of the Delaware General Corporation Law.

Ignore and move on.

(2)  Protective Provisions. I admit there are some nuances in here that merit negotiation (which is why this might have been item 6 (or 7) of terms to negotiate), but the basic principle that there are some things for which the company will need the consent of the series A stockholders voting as a class by themselves is not assailable. Here is the NVCA list:

(i) liquidate, dissolve or wind up the business and affairs of the Company, or effect any Deemed Liquidation Event or consent to any of the foregoing; (ii) amend, alter, or repeal any provision of the Certificate of Incorporation or Bylaws [in a manner adverse to the Series A Preferred]; (iii) create or authorize the creation of [or issue or obligate itself to issue shares of,] any other security convertible into or exercisable for any equity security, having rights, preferences or privileges senior to or on parity with the Series A Preferred, or increase the authorized number of shares of Series A Preferred or of any additional class or series of capital stock [unless it ranks junior to the Series A Preferred]; (iv) reclassify, alter or amend any existing security that is junior to or on parity with the Series A Preferred, if such reclassification, alteration or amendment would render such other security senior to or on parity with the Series A Preferred; (v) purchase or redeem or pay any dividend on any capital stock prior to the Series A Preferred, [other than stock repurchased from former employees or consultants in connection with the cessation of their employment/services, at the lower of fair market value or cost;] [other than as approved by the Board, including the approval of [_____] Series A Director(s)]; (vi) create or authorize the creation of any debt security [if the Company’s aggregate indebtedness would exceed $[____][other than equipment leases or bank lines of credit]unless such debt security has received the prior approval of the Board of Directors, including the approval of [________] Series A Director(s)]; (vii) create or hold capital stock in any subsidiary that is not a wholly-owned subsidiary or dispose of any subsidiary stock or all or substantially all of any subsidiary assets[; or (viii) increase or decrease the size of the Board of Directors].

One thing that people sometimes like to talk about is how many shares of Series A have to be outstanding for the class to have these rights. As a general proposition, the Series A is not going to convert a bunch and leave a bunch just to keep these rights. Pick a number that is sizable enough to discourage gamesmanship and move on.

The nuances that I refer to above are in the bracketed language. Some of these bracketed alternatives could end up having some relevance to you. For example, there are businesses that are looking to get equipment leasing or lines of credit. The notion of being able to do things with the approval of the Series A appointed directors is some modest help. Despite the fact that Delaware law is moving in the direction of making it clearer and clearer that directors owe a duty to the holders of common stock and not preferred stock, there is enough gray zone so that, except in some pretty odd cases, the directors are going to be able to rationalize doing what is in the interest of the Series A holders. Still, in all, it is worth going for that.

One more word of caution. If the list has more stuff on it than the NVCA list, try to negotiate down to the NVCA list.

(3)  Antidilution. Broad based weighed average antidilution is the accepted standard. According to our research it appears in close to all series A deals. This provision for which it is somewhat hard to find a clear intellectual argument, protects investors (a little) against future issuances of securities at prices lower than those paid by the investors. There are some alternatives. I mentioned full ratchet in the intro. If you see full ratchet, consider running screaming from the room. If you see “fully” broad based, it is good for you. But, you are not likely to see it. Sometimes (rarely) you may get no price based antidilution protection (even better for you). If you want to get into this topic more, here is a link. If you clicked on that link, you probably have too much time on your hands.

For the sake of stylistic consistency, here is the NVCA antidilution formula:

“Typical” weighted average:

CP2 = CP1 * (A+B) / (A+C)

CP2  = Series A Conversion Price in effect immediately after new issue

CP1 = Series A Conversion Price in effect immediately prior to new issue

A = Number of shares of Common Stock deemed to be outstanding immediately prior to new issue (includes all shares of outstanding common stock, all shares of outstanding preferred stock on an as-converted basis, and all outstanding options on an as-exercised basis; and does not include any convertible securities converting into this round of financing)

B = Aggregate consideration received by the Corporation with respect to the new issue divided by CP1

C  =  Number of shares of stock issued in the subject transaction

As is the case with all else, there are nuances. In this case, here are some exceptions to the issuances that trigger the antidilution protection for the series A holders. Here is the NVCA list of exceptions:

(i) securities issuable upon conversion of any of the Series A Preferred, or as a dividend or distribution on the Series A Preferred; (ii) securities issued upon the conversion of any debenture, warrant, option, or other convertible security; (iii) Common Stock issuable upon a stock split, stock dividend, or any subdivision of shares of Common Stock; and (iv) shares of Common Stock (or options to purchase such shares of Common Stock) issued or issuable to employees or directors of, or consultants to, the Company pursuant to any plan approved by the Company’s Board of Directors [including at least [_______] Series A Director(s)] [(v) shares of Common Stock issued or issuable to banks, equipment lessors or other financial institutions, or to real property lessors, pursuant to a debt financing, equipment leasing or real property leasing transaction approved by the Board of Directors of the Corporation [, including at least [_______] Series A Director(s)]

You need these exceptions, and it is worth spending a few minutes making sure you have them and trying for the max in flexibility. If you don’t have substantially all of these exceptions, there is something wrong, and you do need to raise the issue.

(4)  Registration Rights. These come into play after you have gone public. You should be so lucky. If you have had your IPO and there is a nice market for your stock and some benighted VC is bugging you about registering some sale of her stock while you are busy swilling martinis on your yacht, you can tell Jeeves to give her the run around. Don’t waste your breath arguing about reg rights now.

(5)  Management Information Rights Letter. VCs need this to meet the tax requirements for Venture Capital Operating Companies (the so-called VCOC rules). Your lawyer should make sure the agreement is in fact standard and does not overreach. Beyond that, go back to sleep. But, I hasten to add, if you are dealing with an investor who is not a VCOC, you can, and should, get rid of this nasty little agreement.

(6)  No-Shop. Your investor will want a period of exclusive dealing during which she can negotiate and close. I see a lot of 45 day periods, but 60 is OK too. My advice: go with the flow.

Well, I am at 4000 words (spread across two posts) and I have skipped over a bunch of stuff in the typical term sheet including such gems as the redemption rights provision. The one I feel badly about is things requiring investor director approval. So, here, by special mention, is the NVCA list of things requiring investor director approval. These are things that a company cannot do unless the board approves and that approval includes the affirmative vote of the series A appointed directors (or at least one of them). As noted with respect to other things above, you would like to keep this list to a minimum.   But, you are not going to be able to make it go away. My comment about the duties of directors under Delaware law applies here, but don’t expect these directors to act against the interest of the series A.

(i) make any loan or advance to, or own any stock or other securities of, any subsidiary or other corporation, partnership, or other entity unless it is wholly owned by the Company; (ii) make any loan or advance to any person, including, any employee or director, except advances and similar expenditures in the ordinary course of business or under the terms of a employee stock or option plan approved by the Board of Directors; (iii) guarantee any indebtedness except for trade accounts of the Company or any subsidiary arising in the ordinary course of business; (iv) make any investment inconsistent with any investment policy approved by the Board; (v) incur any aggregate indebtedness in excess of $[_____] that is not already included in a Board-approved budget, other than trade credit incurred in the ordinary course of business; (vi) enter into or be a party to any transaction with any director, officer or employee of the Company or any “associate” (as defined in Rule 12b-2 promulgated under the Exchange Act) of any such person [except transactions resulting in payments to or by the Company in an amount less than $[60,000] per year], [or transactions made in the ordinary course of business and pursuant to reasonable requirements of the Company’s business and upon fair and reasonable terms that are approved by a majority of the Board of Directors]; (vii) hire, fire, or change the compensation of the executive officers, including approving any option grants; (viii) change the principal business of the Company, enter new lines of business, or exit the current line of business; (ix) sell, assign, license, pledge or encumber material technology or intellectual property, other than licenses granted in the ordinary course of business; or (x) enter into any corporate strategic relationship involving the payment contribution or assignment by the Company or to the Company of assets greater than [$100,000.00].

There is lots that can be said about term sheet provisions not discussed above. There are lots more resources on the web (and elsewhere) including our web site here at Foley Hoag’s Emerging Enterprise Center to help you with term sheets. Keep in mind that in the end you want to (a) close the deal and (b) establish a good working relationship with your investor. Be sensitive to her needs and she will be sensitive to yours. Argue the points that count and settle when you have gotten what you can get. Strive to be tough but realistic and fair, and hope the other side strives for the same.

Dave Broadwin heads Foley Hoag’s Emerging Enterprise Center in Waltham, MA. His law practice focuses on representation of technology companies from start up to exit. Dave also handles venture financings, merger and acquisition transactions, public offerings, private placements, PIPE transactions and executive employment contracts. Dave is a Partner at Foley Hoag and a member of the firm’s Executive Committee.

Term Sheets: Six to One, Half a Dozen to the Other

If Vinod Khosla is standing there ready to write you a check for $10 million, perhaps you should take the money (and not worry about the 1x preference with full participation and 8% dividend) before he changes his mind. These days, clients are having a hard time finding any financing. So, almost always, you take what you can get.

However, let’s engage in the willing suspension of disbelief. A name brand VC has handed you a term sheet with everything slanted her way. You are feeling feisty, and you are ready to negotiate. What should you care about and what should you let go?

I am not going to discuss valuation, except to say that it is a black art (not a science). One piece of evidence to support this observation is that way too many deals are done on what looks like a formulaic basis. The five on five valuation happens way too often to be random. Obviously, negotiate the best deal you can get, but I am going to leave valuation to another post.

I am also not going to discuss full ratchet antidilution. (It has its place is some (very few) deals, but it is not a typical Series A term.) If Vinod presents you with a term sheet that has a full ratchet provision, tell him you will save him from investing in a founder stupid enough to sign up to that.

Finally for this post, I am going to take the words of the various provisions I comment on from theNVCA form term sheet. I strongly recommend that you familiarize yourself with that form (and the related deal docs). They are a gold mine of useful information about all the legal stuff in the investment docs.

Here is my list of six terms you should negotiate over:

(1) Dividends. Hate them dividends. According to us (see, EEC Perspectives), 70% of series A venture deals in New England in Q4 of ’09 had a dividend provision. Dividends ran from 3% to 8% per annum. Let’s assume, for purposes of this post, that the term sheet has this in the dividend provision:

The Series A Preferred will accrue dividends at the rate of 8% per annum, payable only when and if declared by the Board or upon a liquidation or redemption. For any other dividends or distributions, participation with Common Stock on an as-converted basis.

A couple of things to note here (assume per below that the term sheet also provides for a 1x participating preferred): This provision (taken with the provision for a participation) means that, when you sell your company to Google for a princely sum, your investor will get her investment back plus accrued interest at the rate of 8% per annum before you get one penny. BTW, this is also the amount that you would have to pay upon redemption (should that provision ever come into play).

I have reason to believe, based on research, that the average number of years from inception to exit is about 10 years. I also know, based on anecdotal evidence, that the average number of years from initial investment to exit for portfolio companies of top tier venture funds is about 8 years. (Years to exit depends upon so many factors that it is hard to make sense of.)

According to the rule of 72, at 8% in 9 years the amount of the investment will double. So, if the initial investment is $10 million and you exit in 9 years, your investor will get $20 million before you get one penny. In low to mid valuation exits, this can be painful. It also gives the investment a debt like feel rather than an equity feel. Finally, it creates a set of outcomes in which the investor may want to exit and you may not.

So, knowing that in the last quarter 30% of deals didn’t have dividends, I would push back. Argue that it misaligns the interests of the investors and founders. When your investor says that they always get dividends, don’t believe them.   (Our firm keeps a database of deals that tracks who the investors are and what the terms are. As a result, we can tell you, on an investor by investor basis (for the years since we have been keeping the data), whether, and how often, they get dividends.) Try to get no dividends or low dividends. It could be real money to you, and you want everyone’s interests aligned.

(2)  Participating Preferred. Sometimes referred to (when there are no VCs around) as “pig preferred”. So here is the hypothetical participation provision in your yummy term sheet:

First pay one times the Original Purchase Price plus accrued dividends on each share of Series A Preferred. Thereafter, the Series A Preferred participates with the Common Stock pro rata on an as-converted basis.

It should be clear from point number 1 what this means, but just in case, when you sell the business (not in an IPO situation) even in a good scenario, the investor gets its bait back plus the 8% interest (which after 9 years means twice its bait) before you get anything. Then, you and the investor share pro rata on an as converted to common stock basis.

We know, and we have published for all the world to see, that in the last quarter of 2009, 32 % of Series A deals in New England had a 1x participating preferred without a cap on the participation, 9% had a capped participation and 54% had no participation. (The remaining 5% had greater than a 1x preference and are outliers.)

When coupled with a dividend provision, it makes the venture investment work like a note with a warrant – giving the investment a debt-like feel. (BTW, VCs also get board representation – sometimes a majority on the board. I have sometimes wondered why they have not been sued on a lender liability theory, but that is a topic for another post.)

So, the problem with participating preferred is that in low and mid-value exits, the common holders take it on the chin. You do the math. If you raise $30 million and six years in you sell the business for $60 million, what is left for the common. Remember, the founders will not be the only holders of common. You could end up with a meager payday. Maybe that is just and fair, but it certainly misaligns the founders and the investors. Keep in mind that investors have a ten year life on their funds. If they make an investment in year four and then wait six years, they are under pressure to liquidate. You may think you are on the cusp of greatness, and a single may be looking pretty good to your VC. (Also, remember what the numbers say about years to exit.)

Fight this one. Ask for no participation and, perhaps, settle for a capped participation. Just to be clear, in the capped participation scenario, the investor gets the greater of (a) 1x plus dividends plus participation up to an agreed number perhaps 2x the investment or (b) what they get upon a simple conversion to common (i.e. without any participation or preference).

(3)  Founder Representations. A great war has raged over this point between east coast and west coast. For many years, east coast VCs demanded and got founder reps on Series A deals. On the west coast, the view seems to have been that the practice was something close to diabolical. Fortunately for entrepreneurs, the west coast VCs are very close to beating their east coast brethren into submission on the point.

Here is what your term sheet provision might say:

Standard representations and warranties by the Company. Representations and warranties by Founders regarding technology ownership, conflicting agreements, litigation etc.

Try the Nancy Regan defense. Just say no. If that does not work, then focus on setting limits to your liability. Even the most rabid east coasters will accept a limit on liability to your shares in the company. This issue should not come up on B or later rounds.

(4)  Option Plan Vesting; Founder Vesting; Option Pool Provisions. I have noticed an increasing number of VCs that are looking for five year vesting on options (as opposed to four year vesting that has long been the norm). Your term sheet could say something like:

All employee options to vest as follows: 20% after one year, with remaining vesting monthly over next 48 months.

The investors that like the five year vesting argue that you don’t get close enough to an exit in four years and they are going to have to reload and give away more options and dilute everyone etc. All good points, by the way, and, it might also be a tacit admission of the 8 years to exit issue that I pointed out earlier.

Your problem with this approach is that it will be an impediment to hiring the best people (all of whom are expecting a four year vesting schedule). In today’s market it may not matter so much since there is a lot of talent available out there, but as things get better it may. I would resist on this ground and see if the investor does not give it up.

Then there is founder vesting. You might think of this as adding insult to injury, but VCs investing in true early stage series A deals frequently want the founders to agree to some vesting schedule. It is not like option plan vesting just discussed where there is broad agreement on four years and a few looking for five. Here, as the saying goes, you get what you negotiate. Having said that, experience indicates that most VCs will agree readily to something between 25% and 50% fully vested and the rest over three years. BTW, this only applies to true founder shares. To the extent that you pay real dollars for stock, that you keep. The arguments to use in connection with this point have to do with how much time and sweat you have into the business. The more you have in the business; the better your argument for more immediate vesting.

I have been dreading getting to the option pool discussion because I get an inordinate number of questions about how big the pool should be and should it dilute everyone or just the founders. Unfortunately, the answers are not great for the founders (not necessarily bad in a business sense, but you are going to eat the dilution). Your term sheet will have a provision along these lines (BTW, the pool will also appear in the cap table):

Immediately prior to the Series A Preferred Stock investment, [______] shares will be added to the option pool creating an unallocated option pool of [_______] shares.

Unfortunately, because the data is only sometimes publicly available, the sample size for our data on option pool size in New England deals is small. Having said that, option pools for Series A deals cluster around 15% to 20% of the fully diluted capitalization of the company.

Your investor is going to make her investment with the assumption that every option in the pool will be granted. So, if she wants 50% of the company, she means 50% after you have granted all the options in the pool. If the pool is 20%, that leaves 30% for the founders. You are not going to out fox her and get her to agree to a post money pool. (That is she won’t go for 50/50 pre-pool and 40/40/20 post pool. What she might do is 40 for you /60 for her pre-pool (or whatever the numbers are) so that she gets to the 50% place after the pool.)

Keep in mind that all players will agree that they need a pool to attract quality employees. With that in mind if you can make a decent argument for a pool that is on the smaller side, the shares you save may end up in your pocket.

When thinking about the size of the pool, think about whom you need to hire. If you happen to have the key players in place (and they have founder’s stock) you may only need a pool sufficient for the rank and file. This might be a good argument for a smaller pool. BTW, experience indicates that option pools are rarely large enough. They have to be reset to some extent with almost every round of financing. VCs know this better than you do. Nevertheless, under the right conditions, you might save a percent or two on the pool size.

(5)  Board of Directors. Board composition is often highly negotiated. (I am not sure why because it frequently comes out with two for the investors, two for the founders/common holders and a tie breaker who is, at least notionally, independent.) In any case, you want to make sure you have an arrangement that works for you. Here is the NVCA approach:

At the initial Closing, theBoard shall consist of [______] members comprised of (i) [Name] as [the representative designated by [____], as the lead Investor, (ii) [Name] as the representative designated by the remaining Investors, (iii) [Name] as the representative designated by the Founders, (iv) the person then serving as the Chief Executive Officer of the Company, and (v) [___] person(s) who are not employed by the Company and who are mutually acceptable [to the Founders and Investors][to the other directors]

This provision contemplates a very full board; experience indicates that a lot of start-ups don’t have five board members when they close the A round. Look at it this way: Every substantial fund investor gets a seat on the board. Many (most) VCs like to travel in pairs. That means two seats for the VCs. Sometimes you get some smaller investors in the A round. They typically don’t get board seats. However, they sometimes ask for (and sometimes get) observer rights. If they do, you need a specific agreement with the observers so you can easily exclude them from anything that might implicate attorney client privilege. Sometimes the observers are strategic investors and you may want to exclude them from competitively sensitive information as well. It should go without saying, but you want to be sure that you are on the board. An important ask to add in for the founder is to provide that he is still on the board, even if he is no longer CEO.

(6)  Drag Along. My last candidate for a provision that merits some discussion is the drag. (I admit I could have put some other provisions here instead of the drag, like preferred stockholder veto rights, but I wanted to stick with the artificial constraint of my six point list, so I put them later.) You will never get it out (well, never say never, how about almost never). The drag ensures that you must sell when the VCs want to sell (without regard to the structure of the deal). Imagine that your term sheet has words like this in it:

Holders of Preferred Stock and the Founders and all future holders of greater than 1% of Common Stock (assuming conversion of Preferred Stock and whether then held or subject to the exercise of options) shall be required to enter into an agreement with the Investors that provides that such stockholders will vote their shares in favor of a Deemed Liquidation Event or transaction in which 50% or more of the voting power of the Company is transferred and which is approved by the Board of Directors and the holders of ____% of the outstanding shares of Preferred Stock, on an as-converted basis.

In the off chance that you are getting a minority investment, you should resist this on the grounds that the tail should not wag the dog. However, in our imaginary deal, your investor is getting 50% of the fully diluted and you have 30% of the fully diluted. We sometimes see founders negotiate for, and sometimes get, vetoes on the drag.   We sometimes also see provisions where a majority of the preferred together with a majority of the founders are needed to approve the deal to drag everyone else. The investor’s argument is that she does not want you to be able to block a good exit.

Having said all that, I predict that you will lose the larger argument (i.e. there is likely going to be a drag), but you can, and should, place conditions on your participation in the drag. The footnote to the NVCA form term sheet puts it this way:

This provision is typically subject to a number of negotiated conditions, including: the representations and warranties required are limited to authority and title to shares, liability for breaches of representations by the Company is limited to a pro rata share of any escrow amount withheld, any liability is several and capped at the stockholder’s purchase price and that the stockholder receive the same form and amount per share of consideration as other holders of the same class or series of stock.

You should get these qualifications on the grounds of simple fairness. For example, the notion that you would be contractually obligated to accept liability beyond the purchase price in a deal you have to be dragged to seems patently unfair. I think most (all?) investors would agree.

My next post will go into six things not to negotiate (much).

Dave Broadwin heads Foley Hoag’s Emerging Enterprise Center in Waltham, MA. His law practice focuses on representation of technology companies from start up to exit. Dave also handles venture financings, merger and acquisition transactions, public offerings, private placements, PIPE transactions and executive employment contracts. Dave is a Partner at Foley Hoag and a member of the firm’s Executive Committee.

When setting out to be an entrepreneur, most of us are fanatically focused on choosing the right IDEA. The idea is key, right?

Not really.

Some ideas do matter. If you have made a true scientific breakthrough, the idea, and the intellectual property behind it, is everything. If you discover how to create a steel-plastic alloy with the best properties of both, spend some time with patent lawyers.

But if this isn’t you, read on…

Surprisingly, what really happens in most startups is that founders start out with one idea, nearly go out of business, then morph it, nearly go out of business again, and eventually morph it to something that works. This is true in software, services businesses, and frequently even in hard tech and life sciences.

A few examples of this are in order:

- I invested about 10 years ago in a great startup spun out of a national lab that had invented a new biometric identification sensor. The sensor used the chemical properties of the skin, rather than a fingerprint, to pick out the real McCoy. It was good technology, and skirted some of the shortcomings of fingerprints, but it was tricky to build cheaply enough to be economic. Millions of dollars of venture capital and many patents later, the company had yet to release a commercially viable device. But a bright engineer noticed that one of the techniques they were using to evaluate the chemical properties of skin had a side-effect: they could see an unusually clear image of the fingerprint beneath the skin. They realized that they had stumbled upon a better way to image the regular, old fingerprint—better than any approach yet invented. The company is called Lumidigm. The new generation of sensors this company came up with are now what is used in the two highest volume biometric applications in the world–a major theme park in Florida, and the Hong Kong-China border crossing.

- Similarly, when scientists in a hospital ward in Swansea, England were experimenting with sildenafil citrate to treat a form of chest pain, they found that it didn’t help much. But an alert (and possibly red-faced) nurse reported a lot of the patients were ‘tenting’. This compound became a multi-billion dollar success under its more recognizable commercial name: Viagra.

- The fastest-growing tech startup in Massachusetts (that I know of) today is a company called Hubspot, run by a couple of Sloanies, Dharmesh Shah and Brian Halligan. They “original” idea that they pursued (while still at MIT) was to build a web-based application to “run” a business. This included (amongst other things) a lightweight database application. What they figured out along the way was that people were much more interested in figuring out how to market their product and grow their business, than run their business. For many, they could run their business on a spreadsheet just fine, but they weren’t able to get leads and customers. This got them side-tracked on a project to understand how well a business was doing online with their marketing efforts. To evaluate that, they built a tool called Website Grader. People said it was cool, so they made it available for free. The tool took off and became in Internet hit. Thousands of companies contacted them asking for help improving their online marketing. The company realized that the essential core of what they were doing was to help companies figure out how to explain themselves in a way that would allow potential customers to find them online. They coined the term “Inbound Marketing” to refer to this discipline, built a rapidly growing business, and have since published a bestselling book by the same name, on that topic.

- My own business, originally called Cambridge Incubator, was started as a kind of factory to quickly produce companies based on some ideas that myself and some friends had come up with. That turned out to be a bad idea, probably because we weren’t smart enough to do this well. But we were stuck with a big, beautiful facility we had built with our venture capital dollars, and a long-term lease obligation to our landlord, MIT. Without much choice, we started renting our pretty space out to other people’s startups that we had no equity stake in. And we were surprised to discover that that business–providing nice space to startups, and the benefits of community that came with it–was a very fast-growing business. We now operate what may be the largest facility in the world doing this.
If you are convinced of my thesis, that the original idea doesn’t matter a whole lot, then it follows that what must matter more is good, flexible execution.

My advice: start with just about any ’starter idea’ (a good, attractive idea that will get you and collaborators going), and then morph it like crazy until you find a sweet spot with high growth and compelling economics. This appears to be how many incredible businesses have been built.

Tim Rowe is the Founder and CEO of Cambridge Innovation Center, a sponsor of the MIT $100K. CIC houses approximately 240 startups, and is perhaps the densest collection of startups anywhere in the world. The Boston Globe has described CIC as “what may just be the most important building in Greater Boston”. In January of 2010 CIC announced a 10-year renewal of its lease with MIT, including an addition of 57,000 new square feet of custom-designed space for entrepreneurs.
Tim is also a Founder and Venture Partner with New Atlantic Ventures, an $115M early stage technology fund based in Kendall Square.
Tim has also served as a judge for the MIT $100K.

$5000 Grand Prize

Rouzbeh Shahsavari
Nano-engineered Concrete
MIT Graduate Student
Energy Track

$2000 Runner-Ups

Dean Berlin
Callinix
MIT Sloan
Life Sciences Track

Laura Paulsen
The Apex by Hydrangle Systems
Johns Hopkins Undergraduate Student
Product & Services Track

$1000 Audience Choice Award

Laura Paulsen
The Apex by Hydrangle Systems
Johns Hopkins Undergraduate Student
Product & Services Track

Top 10 Pitches By Track:
** Semifinalist

DEVELOPMENT

** Mike Norman
Networthy
MIT Sloan MBA Student

** Cody Simmons
UFund
Brown Undergraduate Student

Jimena Almendares
FI Escorpion
MIT Sloan MBA Student

Alex Angerer
Ivy Plus Sperm Ban
MIT Sloan MBA Student

Elizabeth Basha
TerraMetric Development
MIT Graduate Student

David King
WorthMoreThan1000Words
MIT Alumnus

Cliff Lee
SharedSchool

Nelson Meehan
Oral CourseWare
MIT Alumnus

Alastair Ong
GreenSoul Shoes

Ram Rijal
Empowering the Poor
MIT Undergraduate Student

ENERGY

** Charles Able
High Speed Dual-Sring Drilling
MIT Alumnus

** Rouzbeh Shahsavari
Nano-engineered Concrete
MIT Graduate Student

Brian Ahern
Ion-Assisted Combustion
MIT Alumnus

Ben Glass
Altaeros Energies
MIT Graduate Student

Perry Grossman
LED Lights

Rob Lemos
Energy Efficiency
MIT Sloan MBA Student

David Perry
Liver Ember System
RPI Undergraduate Student

Lennon Rodgers
Rapidly Charging Electric Vehicles
MIT Graduate Student

Pedro Santos
Natural Gas Compressor
MIT Sloan MBA Student

Shobin Uralil
Element 14
MIT Sloan MBA Student

LIFE SCIENCES

** Dean Berlin
Callinix
MIT Sloan MBA Student

** Gaurav Das Gaiha
APS Technologies
MIT Graduate Student

Ashly Aust
PeeWizz
RPI Graduate Student

Mac Cowell
LabCloud
Harvard Graduate Student

Noah Davidson
Probiotic Antibiotic Solution
MIT Graduate Student

Sasha Gimpelson
Instant Cancer Treatment & Diagnostics
Harvard Business School

Han Lee
Stem Cell Expansion
Yale Alumnus

Gauti Reynisson
MEDi
MIT Sloan MBA Student

Tom Rose
Short-Shelf-Life Drugs
MIT Sloan MBA Student

Asvin Srinivasan
Safety Spine
MIT Sloan MBA Student

MOBILE

** Ethan Frank Dameron
Consumer Executed In-Store Promotion Auditing

** Jeremy Rossmann
The Bigger Picture
MIT Undergraduate Student

Reid Capalino
Deep Television
MIT Alumnus

Collin D. Wallace
FanGo
Harvard Business School

Maria Fraile
NoMad
MIT Sloan MBA Student

Andre Hamman
MobileBusiness
MIT Sloan MBA Student

Aldi Haryopratomo
PhoneDoctor
Harvard Business School

Miro Kazakoff
My-nalysis
MIT Sloan MBA Student

Harold Mateo
Mobly
Babson Graduate Student

Pulkit Sharma
Electronic Built Environment
MIT Graduate Student

PRODUCTS & SERVICES

** Laura Paulsen
The Apex by Hydrangle Systems
Johns Hopkins Undergraduate Student

** Max Winograd
NuLabel Technologies
Brown Alumnus

Victor Costan
Shower Temperature Control 2.0
MIT Undergraduate Student

Eric Arno Hiller
Innovattio Products

Christina Hruska
VO2 Microbolometer Platform
Harvard Business School

Julia Hu
PSST
MIT Sloan MBA Student

Jakob Parslov
OroClean
RPI Graduate Student

Mohammad Raafat
Portable Fruit Testing System
MIT Graduate Student

Robert Schafer
NeuroMatch
MIT Postdoctoral Fellow

Jason Strauss
Bend-n-Bake
MIT Undergraduate System

WEB/IT

** Elizabeth Geisinger
MyHometownLink
Bucknell Alumnus

** Anmol Madan
BabbleSort
MIT Graduate Student

Jeff Chen
Kakeya
MIT Undergraduate Student

Jeff Engler
Peer to Peer Commercial Lending
Harvard Business School

David Friedman
JobPlanr.com

Eric Arno Hiller
End Around

Jahon Jamli
CatchMyCar.com
Babson Graduate Student

Ian McGraw
Voice-U-Script
MIT Graduate Student

Salil Sethi
Intelligent Mail (IMAIL)
MIT Sloan MBA Student

Julian Yuen
Sell It Now
MIT Undergraduate Student

As I’ve transitioned out of school and back into the real world over the past year, it’s occurred to me that the MIT $100K board should maybe add a last piece to the above sentence: “ […] to help build companies in particular by teaching entrepreneurs how to build teams, and why they should always be selling!” More on the selling piece in a future post, safe to say that you always need to be selling – prospects, vendors, investors, employees, etc. If you’re an MIT student you should not leave Cambridge without taking Howard Anderson and Bill Aulet’s class, 15.387 Technology Sales and Sales Management.

You can’t win the MIT $100K without a great team.

In my experience, teams are what make or break you. It was true in the two seasons of the MIT $100K that I personally experienced. Finalists and winning teams were always cohesive, complimentary, performing teams of engineers and business students, leaders and role players, everyone with a specific position – and the team greater than the sum of its parts.

It was equally true on the MIT $100K organizing teams that I was fortunate enough to be a part of. I was honored to work with some of the brightest, most passionate and most driven entrepreneurial minds at MIT and beyond. We organized a year-long, three contest competition, with literally thousands of student participants, dozens of industry sponsors and 15+ events throughout the year. And we did it all as full-time graduate student volunteers! We worked well together, celebrated each other’s victories and picked each other up when the going got tougher.

In basketball or entrepreneurship, five all-stars do not a team make.

Before you go out and recruit a team of all-star, prima donnas who want the glory but don’t want to do the dirty work, remember the USA Olympic basketball team of 2004? They ended up with the bronze medal and were beaten by supposedly lesser teams like Puerto Rico. Let me repeat that: USA Basketball got a Bronze Medal at the Olympics! Why? Simple: they didn’t play like a team, they played like individual all-stars out for the stats, not the W.

It is a lot more than just putting some all-stars together. It’s about cohesion, culture, leadership and roles. I’m learning this myself all over again at SaaSure, my new enterprise Software-as-a-Service company (http://www.saasure.com). In our case, we quickly learned that all-star coders might write better software in isolation, but if no one wants to work with them they won’t do you much good. Just like in basketball, enterprise software is built as the sum of parts, and if those parts don’t integrate well together, you’ll be going nowhere fast.

Teamwork starts at the top – you must lead by example.

VCs say that they invest first in markets, second in teams and third in products.
As an enterprise software guy, the future in my industry is clearly is cloud computing, so when I was looking to start my next company my direction was an easy choice. But as any VC will also tell you, it’s very hard to be a solo entrepreneur. So when my co-founder Todd McKinnon and I started talking about working together, we quickly dug into “how we’re going to functionally work together.” Hard conversations to be sure, but a necessary task if you want to build a world-class company!

Now that we’re off and running, with our first paying customers going live, not a day goes by here at SaaSure where we don’t think about how lucky we are to have such a great team: Todd runs product and engineering, with a fantastic core group of engineers, and I am focused on customers and operations. Our first hires were key and we spent a lot of our time interviewing candidates and eventually honed in on the right teammates. After a strenuous, lengthy and detailed process of interviews and coding tests, we started all engineers off on a 2-month contractor agreement to make sure that it’s the right fit in terms of culture, vision, work ethic, etc. We want to make sure that “we really like each other before getting married” to put it simply.

Everyone’s process is different and optimized for different situations. At Salesforce.com we often talked about the “double beer test”. After all the credentials had been checked and interviews passed, the hiring team would get together and ask whether a. you’d invite the candidate out for a beer, and b. if they accepted, would you be happy to have them along. At the end of the day, as an entrepreneur at a startup you’re going to spend a lot of time with your colleagues – more than with your wife and children most likely, for weeks or months on end – so make sure you all like each other. As an old sales manager of mine used to say, “we win together, so don’t fail alone!”

Frederic Kerrest is passionate about enterprise technology and has spent the last 12 years helping companies improve their operations by embracing software solutions. In early 2009, Frederic co-founded SaaSure with the vision of empowering businesses to transform their web applications into an intelligent, integrated Cloud Area Network™.

From 2007 to 2009, Frederic attended the Massachusetts Institute of Technology’s Sloan School of Management where he was the 2008 MIT Patrick J. McGovern, Jr. Entrepreneurship Award recipient and Managing Director of the MIT $100K Entrepreneurship Competition.

Frederic earned a BS in Computer Science from Stanford University and an MBA in Entrepreneurship & Innovation from the MIT Sloan School of Management.