Do More Faster

by Brad Feld

  A founder goes to work in the “quiet room” at the Techstars Bunker in Boulder.

  There are cases where founders and investor clash, and founders leave the company early and lose some of their founder’s stock to vesting. While a founder leaving is something to be conscious of, it’s usually pretty easy to find out the reputation of potential investors to see how they’ll approach this situation. If they have a reputation for dealing with situations like this fairly, you shouldn’t have much to worry about. And if they don’t, you should seriously consider whether you want their investment in the first place.

  Chapter 74

  Your Brother-in-Law Is Probably Not the Right Corporate Lawyer

  Brad Feld

  Brad is a partner at Foundry Group and one of the cofounders of Techstars.

  Entrepreneurs hate to spend money on lawyers, especially early on. I’m a good example of this. My first company (Feld Technologies) spent $99 to incorporate our company in Delaware, wrote our own one-page contracts, and didn’t hire a lawyer until we were negotiating the sale of our company seven years later. At that point, we paid handsomely for our shortcuts because we had very few of the formal records required by the company that wanted to purchase our company. We were lucky, though, because our business was simple, had no investors or shareholders other than the three original partners, and didn’t have any litigation over the course of our business.

  When I made my first angel investment (in NetGenesis) after selling my company, I got an education in how lawyers work with startup companies. I resisted it at first, but then realized that I was investing $25,000 of my hard-earned money into NetGenesis and I wanted to make sure my ownership stake was properly documented. Fortunately, the company found great startup counsel (Joe Hadzima—a well-known early-stage lawyer in Boston at the time). We documented everything correctly and inexpensively, including vesting arrangements for the six founders, which quickly turned into four, with only a small amount of vested stock going to the two who bailed early.

  Over three years of making angel investments, I became an expert at early-stage company formation. The legal stuff made me very tired, especially with the endless, ponderous negotiations about mostly irrelevant things. In my mind, most of the negotiation and corresponding documentation could be reduced to fill in the blank exercises. However, the lawyers rarely let the business people, especially the inexperienced first-time entrepreneurs, do this.

  When the lawyers are experienced at working with startups, things often take longer than they need to, but get done. However, when the lawyers aren’t experienced, things can go off the rails very quickly. I’ve sat across the table from a variety of lawyers, including estate lawyers, criminal lawyers, employment lawyers, personal injury lawyers, and divorce lawyers—all of them trying to negotiate startup investments. While these experiences would make for entertaining sitcoms, they were excruciating exercises in pointlessness.

  Each of the non-startup lawyers had something in common: they all had some personal relationship with the entrepreneur (wife, old college friend, parent’s friend, or teacher), which created a deep trust relationship between the non-startup lawyer and the entrepreneur. While trust is important, the lack of understanding about startups made the negotiation harder, as the phrase “You don’t understand—that’s not how it works” didn’t mean anything to either party. Exasperation comes quickly in these situations, because there is nothing quite as bizarre as negotiating a vesting agreement with a divorce lawyer who thinks his client should “get everything, right now, no matter what.”

  The best thing an entrepreneur can do in this situation is to get a qualified lawyer to help her out. And the best thing an investor can do is to suggest the entrepreneur get a qualified lawyer. This has to be done with some tact, because the unqualified lawyer’s first response is to tell the entrepreneur that finding another lawyer is merely a negotiating tactic.

  I’ve stopped trying to work with lawyers who aren’t domain experts—it’s just not worth the brain damage. A qualified lawyer can save you an enormous amount of time and trouble. One who isn’t qualified, even if he’s your brother-in-law, can blow up everything. Go with the qualified lawyer every time.

  Chapter 75

  To 83(b) or Not to 83(b), There Is No Question

  Matt Galligan

  Matt is a serial entrepreneur, having founded and been the CEO of Socialthing, SimpleGeo, Circa News, Picks & Shovels, and his latest venture, Interchange, a cryptocurrency portfolio management company. Matt was in the 2007 cohort of Techstars, where he worked on Socialthing, raised angel funding, and was acquired by AOL in 2008.

  There are some documents that you’ll sign in the course of your life that are decidedly more important than others. Your marriage license, birth certificate of a child, and your will and testament are all perfect examples. But as a startup founder, you should add one more to your list of important documents to sign: the Section 83(b) election.

  What is that, exactly? First, let’s step back and take a refresher course in restricted stock, as all startup founders should know exactly what this is and how it affects them. Specifically, restricted stock makes use of a vesting schedule that will cause your stock to be earned by you over time, rather than all at once. While entrepreneurs don’t ever start a company thinking that one of the cofounders would betray them, or maybe just not be quite up to snuff, it happens more often than expected. Because of that, restricted stock puts protections in place that allow the company to take back some of the stock that was granted to the founder in the first place if he doesn’t work out, or decides to leave the company voluntarily. Every startup should use restricted stock with a vesting schedule to protect the founders in case one of them leaves early.

  The day that your stock is granted, you don’t have to report the gain as income. As soon as the stock starts to vest, however, you have to start reporting income on the increase in value on the stock you are vesting. There are a variety of things that cause an increase in the value of the stock besides normal business progress, such as when the company raises a financing at a higher valuation or is acquired. Even if the company hasn’t been acquired, any time there is an event that causes the stock to be worth more, you have to pay tax on the value of the stock. So, when your company is worth $10 million on paper, and you own 10% of that, you’ll have to pay tax on the stock accordingly. But, since the stock is valued only on paper, you don’t actually have the cash to pay the tax. I know what you’re probably thinking, and you’re right—this sucks.

  I’m here to tell you that there is another way. And, in my case, it comes from a firsthand lesson that I learned the hard way.

  There is a magic document in the tax code called an 83(b) election. This election allows you to pay all the tax on the stock that has been granted to you ahead of time, regardless of vesting. The reason you want to do this is because when you start your company, your stock is likely worth the least amount it will ever be worth, and the amount of tax you will need to pay is negligible.

  Take a pretend corporation, ACMESpace, as an example. When ACMESpace is founded, the stock has a value of $0.001 (a tenth of a penny). ACMESpace is successful, grows nicely over a two-year period, and is acquired by BIGCorp for $10 million. If there were a total of one million shares outstanding, each share would be worth $10.00. Obviously, that’s very different from $0.001 per share. If the stock all vested upon the closing of the transaction and I owned 20% of the company, then I’m paying ordinary income tax (35%) on $2 million.

  I wouldn’t owe that $700,000 if I took the 83(b) election. Then I would only have to pay ordinary income tax (35%) on $200 and capital gains tax (15% but going up to 20%) on the rest.

  We made that exact mistake when we sold my first company, Socialthing, to AOL in August 2008. When we formed the company, our lawyers gave us 83(b) election forms to fill out, sign, and mail. But we never sent them to the IRS. And here’s the kicker: you must file the election within 30 days of your
stock grant or lose the 83(b) election option forever. So, the scenario described here became all too real. Because we neglected to send in a very simple document, we ended up paying a lot more tax than we needed to when we sold our company.

  The moral of the story is this: if you have already started your company, double-check with your legal counsel that you have filed your 83(b) election. If you have started or are getting ready to start your company, make sure that just after you prepare your restricted stock grants, you get your 83(b) election signed and filed. Don’t make the same mistake we made. It will cost you a lot!

  While Matt is good-natured today about the mistake he and his founders made, it was painful at the time we all encountered it. AOL and Socialthing had agreed on the terms of an acquisition and the lawyers were drafting documents and putting together the Socialthing diligence material. Brad was at his house in Homer, Alaska, and remembers the call with Matt well since he was at a gas station filling up his car when the call came in. Matt said, “Brad, what's an 83(b) election?” Brad replied, “Matt, please don't tell me you don't have an 83(b) election.” Matt answered, “I don't have an 83(b) election. What is it?”

  Over the next few days, in addition to the normal stress generated by a transaction, Matt had to endure a number of calls with Brad and lawyers sorting through the stock vesting dynamics, the price of the stock at various points in time, and ultimately a spreadsheet that showed the tax implications of not having the 83(b) election. While Matt and his cofounders were frustrated that they didn’t have the election, they also acknowledged that the lawyers had given them the docs and the envelopes to mail them in—they just didn't ever get around to it.

  In the end, it all worked out fine. Matt and his cofounders paid more tax than they would have if they had made the 83(b) election, but the deal closed and everyone was still very happy.

  Today, when someone in Techstars asks us about 83(b) elections, we just say “Go talk to Matt Galligan.” That usually takes care of it.

  The founders of Intense Debate were happy they took the 83(b) election.

  Theme Seven: Work–Life Harmony

  Most of us who play this game called entrepreneurship have an amazing work ethic—seven days a week, from before sunup to well past sundown, and when we’re not working, we’re thinking about our business. It’s really hard to succeed as a startup founder if you don’t have this type of commitment. But in our experience, the best entrepreneurs also know how to disconnect and unwind. They find a balance, which we like to call “work–life harmony,” that works for them and it makes them stronger entrepreneurs.

  We often work with young first-time founders at Techstars. Most of them have bought into the myth that you have to work constantly in order to succeed. We disagree with that; instead, we think you just have to work productively, and there’s a huge difference.

  To work productively, you need to occasionally recharge your batteries. Some people can do this by just taking a week off once in a while. Others can do it by going on a bike ride. Work and life harmony take many forms because each of us needs to find our own way of achieving it.

  Even in the hectic 90-day period that constitutes Techstars accelerators, we try to provide balance. We organize a few hikes, a bar crawl here or there, perhaps even a night outdoors for a movie at the Red Rocks Amphitheater. On the day before investor day we ask the founders to take the day off and relax. We’ve even been known to surprise the founders by bringing in massage therapists close to investor day. Everything happens fast at Techstars accelerators, but these little things actually add to their productivity, refreshes them, and helps to provide perspective.

  The bottom line is that without balance, you’re sure to fall down sooner or later. We don’t want you to fall down, and this chapter is designed to share with you the tips and tactics we’ve found helpful to be more productive, and to enjoy life.

  Theme Work–Life Harmony

  Chapter 76

  Discover Work–Life Harmony

  Brad Feld

  Brad is a partner at Foundry Group and one of the cofounders of Techstars.

  The challenge of finding that elusive work–life harmony is a central theme for many people, especially entrepreneurs. It took me 15 years, a failed first marriage, and my current wife almost calling it quits for me to realize that I had to figure out what work–life harmony meant to me. Today, I can comfortably say that I have a major clue and both my and my wife’s life are dramatically better for it.

  I started my first company when I was 19 and in college at MIT. I was obsessive, worked incredibly hard, and, while I generally had a lot of fun, was almost always maxed out. This manifested itself in many ways, including always being overcommitted, regularly being exhausted, having a failed marriage when I was 24, and physically changing, according to one of my best friends, from “skinny Brad” to FOB (“fat older Brad”).

  I was very successful at the work I did during this time. The first company I created, Feld Technologies, was acquired by a public company. I helped start or finance a number of other companies that went on to be acquired or go public. I cofounded a venture capital firm. I was well known and respected within the entrepreneurial community, both for what I had accomplished and for what I was working on.

  However, I had absolutely no balance in my life. I was on the road from Monday to Friday, arriving home exhausted at the end of the day Friday. My wife, Amy, got “the dregs” over the weekend. I’d sleep a lot, spend time in front of my computer getting caught up on all the crap I didn’t get to during the week, and when we went out, I’d always be tired and withdrawn. The burnout cycle continued; every six months I’d completely crash from the effort. On one vacation to Hawaii with friends, I slept 20 hours a day for the first four days—so much that Amy thought something was physically wrong with me. I drank too much, I struggled with my weight, and I felt physically crappy. I loved my work, but I couldn’t see past it.

  At age 34, on a long weekend with friends, I was completely absent and struggling to get through a difficult deal (for a company that eventually failed). Amy turned to me and said “I’m done. I’m not mad; I just don’t want to do this anymore. You either have to change, or it’s over.”

  That woke me up! We spent the rest of the weekend talking about what change meant. I knew that this wasn’t a warning. After that weekend, we created a set of well-defined rules that have evolved over time. As I discovered what work–life harmony meant to me, the rules evolved into a set of habits that include spending time away, having what we call “life dinner,” segmenting space, being present, and allowing myself time to meditate. The following are examples of each habit.

  Spend Time Away: Amy and I take a week-long vacation each quarter (which we fondly refer to as “Qx Vacation,” depending on which quarter of the year it is). During this vacation we completely disappear. No cell phone, no email, no computer, no conference calls. My assistant knows how to find me in case of an emergency; otherwise, Amy and I are completely unavailable for the week.

  Life Dinner: We have a standing date on the first day of every month that we call life dinner. We’ll occasionally invite friends, but we often have dinner alone. We have a ritual in which we give each other a gift ranging in value from nominal or silly (a fart machine) to expensive or romantic (jewelry). We spend the evening talking about the previous month and about the month to come, grounding ourselves in our current reality.

  Segment Space: We have several homes, including one in the mountains of Boulder, Colorado, and one in the small town of Homer, Alaska. Both have nice office areas that are clearly separated from the rest of the house. We treat our houses as a retreat from the world and, while we do plenty of working at home, where we do this is separate and distinct from the rest of the house. We segment the physical space into a work space and a nonwork space to keep those boundaries secure.

  Be Present: One of Amy’s lines to me is “Brad, be a person.” This is a signal to me that I’m not present in
the moment, that something is troubling me, or simply that I’m tired. Whenever I’m not present, it only takes a short phrase to pull me back from wherever I’ve drifted off to.

  Meditate: I use the word meditate metaphorically—everyone should meditate their own way. At age 35, I became a marathoner—the 6 to 10 hours a week I run is a form of meditation for me. I’m also a voracious reader, and the 10 hours a week I read extends my meditation time. Today, I meditate 20 minutes a day several times a week and float in an isolation tank for two hours once a month. Do whatever you want as a form of meditation but spend some of your time on yourself.

  The habits have created a structure for my life that not only encourages but reinforces a healthy work–life harmony. My work, which used to overwhelm everything else I did, is still a central part of my life. It is no longer my singular focus, however, nor is it the most important thing to me anymore. The harmony that I’ve discovered has helped me understand the value of other things, which has made my work and, more importantly, my life, much more rewarding.

  Chapter 77

  Practice Your Passion

  Eran Egozy

  Eran Egozy, Professor of the Practice in Music Technology at MIT, is an entrepreneur, musician, and technologist. He is the cofounder and chief scientist of Harmonix Music Systems and developed Guitar Hero. He has been a Techstars mentor since 2009 and was a founding investor in Techstars Boston.