How to Create the Next Facebook: Seeing Your Startup Through, From Idea to IPO
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Venture lender: A financial firm that provides loans to early-stage companies. The terms are usually 6 to 18 months.
Vesting: The process of earning the right to buy shares of a stock option. This usually means an employee must continue to work for a company for a set period of time. A typical vesting schedule is for a one-year cliff and then three years of monthly vesting. That is, after one year, the employee has the right to buy 25% of the shares of the option. After this, an incremental amount of shares vest each month.
Virtual good: A digital item that a person can buy. Often, this is for a social game, such as from Zynga. Facebook has a Payments platform to allow for these transactions.
Warrant: Similar to an option, which gives the right to buy a fixed number of shares for a certain price. There is no vesting. A warrant is usually granted as part of a funding.
Work for hire: A clause often found in a contractor’s agreement. It means the clients own all the intellectual property.
Index
A
Accelerated vesting, 22
Accrual method, 107
Apple, 28
Asset protection, 177–178
B
Bioinformatics, 181
Birchbox, 43
Business model
commissions, 128
customer fragmentation, 129
customer retention, 129
data selling, 127
Facebook
advertising business, 122
advertising system, 123
communications platform, 122
hire top people, 123
mobile advertising, 123
privacy, 122
revenues, 122
flawed, 128
Freemium, 127
gross margin, 129
innovation, 125
marketing, 129
marketplace, 126–127
payments business, 123
predictable revenue, 129
revenue drivers, 124
sustainable competitive advantage, 129
Business strategy
acqui-hire, 148
communications, 152
company’s patent portfolio, 148
compensation and benefits, 151
due diligence, 149
integration
customer care and cost cutting, 150
plan, 151
post-deal method, 150
resource allocation, 151
mobile photo sharing, 147
strong technology, 148
user-base acquisition, 149
C
C-Corp, 18
Chief executive officers (CEOs)
company growth, 134
data driven, 135
evils of politics avoidance, 134–135
fake, 135–136
Friendster, 131
passion for business, 136
photo-sharing concept, 135
trivial activities, 134
Zuckerberg
business card, 132
communication and attitude, 132
corporate imprinting, 132
criticism, 132
emerging problems, 133
Graham’s long-term strategic ideas, 132
town-hall meetings, 133
Cisco, 154
Common law trademark, 26
Company, selling
buyers, 155–156
buyout offer, 154–155
deal process
asset purchase, 157
breakup fee, 159
employment agreements, 159–161
No-Shop Clause standard, 159
price, 156–157
representations and warranties, 158–159
stock purchase, 158
valuations, 154
Cost to acquire a customer (CAC), 98
Customer lifetime value (CLV), 97
Customer relationship management (CRM) software, 7
D
Dealmakers
anti-dilution, 88–89
Board of Directors, 87–88
company’s valuation, 83–84
conversion rights, 90–91
dividends, 91
drag-along provision, 89–90
due diligence, 94
Founder’s Activities, 93
information rights, 94
liquidation preference, 86–87
massive dilution, 84
negotiations
collaboration and aggression balance, 83
exploding term sheet, 83
hostile tactics, 83
no-prisoner’s approach, 83
silent approach, 82
no shop clause, 91–92
pay-to-play, 89
protective provisions, 92
redemption rights, 91
registration rights, 92–93
resale restrictions, 93–94
valuation
comparable transactions, 84
critical deal terms, 86
option pool, 85
ownership percentage, 84
pre-money, 85
tax problems, 85
Digital sky technologies (DST), 50
Donation-based crowdfunding, 55
E
Earnings before interest, taxes, depreciation, and amortization (EBITDA), 106
F
Fair market value (FMV), 145
Financials
accounting fundamentals, 105–106
balance sheet
accounts receivable, 114
assets, 113–114
cash and cash equivalents, 114
Facebook, 112, 113
Goodwill, 115
liabilities and stockholders’ equity, 115
marketable securities, 114
prepaid assets, 114
property and equipment, 114–115
cash flows statements
Facebook, 115–118
financing activity, 118
investing activity, 118
operating activity, 118
conservativism, 107
income statement
cost of revenue, 109
gross profit, 109–110
marketing and sales, 110
net income, 111–112
overhead costs, 110
period of time, 107, 108
research and development, 110
revenue, 109
Funding process
business plan, 46
investment stage
accelerators, 54
angel funding, 52
AngelList.com, 53
angel networks, 52
crowdfunding, 54–56
free equity, 56–57
investors management, 56
old-fashioned networking, 53–54
seed funding, 51–52
IPO
authorized stock, 59
common stock, 59
company valuation, 60
outstanding stock, 59
preferred stock, 59
securities law, 61
seed series, 61
pay-as-you-go approach, 46
types of investors
angel, 46
late-stage funders, 50–51
strategic investment, 48–49
superangels, 47
venture lenders, 49–50
venture capitals (VCs)
carry, 48
firm, 47, 48
limited partners, 47
seed investors, 57–58
venture rounds, 58
G
Generally accepted accounting principles (GAAP), 106, 167
Gold Shares (GLD), 176
Go-to-market strategy
celebrity factor, 104
key marketing metrics, 97–98
meetups, 102
partnerships, 98–100
PR
ad nauseam, 103
blogs and publications, 102
e-mail, 103
Forbes.com, 102–103
negative medi
a coverage, 104
search engine optimization (SEO), 101
types of markets
blue ocean strategy, 96
innovator’s dilemma, 96
Yelp, 96
viral distribution, 100–101
Groupon company, 37
H
HarvardConnection, 15
I
Initial public offering (IPO)
acceleration request, 170
archaic federal securities rule, 165
attorneys, 167
auditor, 167
authorized stock, 59
bake-off process, 168
class A and class B stock, 165
common stock, 59
company valuation, 60
credibility, 164
culture change, 170–171
exchange selection, 169
Facebook, 164, 171–172
financial reporting system, 166
gun jumping rule, 168
hiring key senior executives, 166
national exchange, 164
outstanding stock, 59
preferred stock, 59
prospectus, 1–2
road show, 169–170
Sarbanes-Oxley (SOX) law, 166
securities law, 61
seed series, 61
seat-of-the-pants approach, 168
secondary offering, 164
underwriter, 167
Intellectual property, 25
Internal Revenue Service (IRS), 23
L
Legal structure
83(b) election, 23
business transactions, 14
code protection, 28
common law trademark, 26
government regulations, 27–28
incorporation
advantages, 18
four triggers, 17–18
LLCs, 18, 19
tax payment, 18
LegalZoom, 14
NDA, 16
noncompete agreement, 16
nonsolicitation agreement, 17
split equity, 20
startup attorney, 14, 15
stock options, 17
stock payment, 24
termination and change of control, 22
trademark application, 26
URL, 26
vested founder’s stock, 21
work-for-hires, 16–17
Yahoo!, patent filing, 24–25
Yammer company, 25
Zuckerberg’s experience, 15
Letter of intent (LOI), 149, 150
Limited Liability Company (LLC), 18–19
M
Market capitalization, 111–112
Matching principle, 107
McAfee’s strategy, 175
Minimum viable product (MVP), 72–73
Morse code, 2
N
Nondisclosure agreement (NDA), 16, 74
P
Peak Theory of oil, 180
Peer-to-peer lending, 54–55
Personal computer (PC) project, 37
Pitch
criticism and comments, 76
data room, 77–78
deck
assumption, 64–65
business model, 69
clutter, 64
common features of, 65
competition, 70
exit strategy, 65
financial forecast, 70–71
financing, 72
go-to-market strategy, 70
Hollywood, 65
mission, 66
opportunity, 67–68
PDFs, 65
product, 66–67
team, 68–69
elevator pitch, 64
fake VC, 78
formal business plan, 73–74
friendlies, 76
fundraising plan, 76, 77
investor section, 79
leverage, 79, 80
NDA, 74
pecking order, 79
predetermined announcement date, 79
presentation skills, 75–76
referral, 75
right VCs, 77
thick skin, 79
unsolicited e-mail, 74
visualization, 72–73
wrong investor, 75
Prepurchase model, 55
Product development
creativity, 29–30
customer satisfaction, 35, 36
elegant design, 34
Facebook, 32
Groupon company, 37
mobile devices, 39–41
MySpace, 33
online sharing, 33, 34
physical world, 42–43
platform concept, 37–38
poke function, 37
product engagement, 34, 35
product feature and category, 31
reactive product design, 38–39
social networking component, 31
stealth startup concept, 41–42
timing and luck, 30, 31
S
Sarbanes-Oxley (SOX) law, 166
S-Corp, 18
Search engine optimization (SEO), 101
Securities and exchange commission (SEC), 165
Service virtualization (SV). See Virtual service
Skullcandy company, 6
Synapse tool, 6
T
Team
adult supervision, 138
co-founder, 139–140
compensation strategy, 144–145
growth management, 139
hiring decisions, 137
layoffs, 146
outsourcing, 145–146
recruitment, 140–141
sales people, 143–144
Uber engineers hiring, 142–143
Total addressable market (TAM), 68
V
Venture capitals (VCs), 8
carry, 48
firm, 47, 48
limited partners, 47
seed investors, 57–58
venture rounds, 58
Vesting in peace (VIP) concept, 170
W
Wealth management
alternative investments, 176–177
angel investing, 177
asset protection, 177–178
core portfolio, 176
GLD, 176
risk vs. reward, 176
secondary transactions, 174–175
taxes, 177
Z
Zip2, 9
Zuckerberg, M.
Beacon, 10
Bennioff’s CRM software, 7
Facebook
communication tools, 1
IPO prospectus, 1–2
popularity and empowering nature, 2
failure businessmen, 10
financial information, 5
Forbes.com, 4
Gmail account, 4
internet companies, 11
lifestyle business, 8
Mint.com, 5
Morse code, 2
Musk’s entrepreneurial journey, 9
National Snowboard company, 5
online social network, 3
Patzer’s pure enthusiasm, 5
philanthropy, 178
Salesforce.com, 7
statements, successful companies, 3, 4
Steve jobs, 7
telegraph, 2
venture capital, 8
Wirehog, 6