MARTIN OMANDER: Hello.
I'm Martin Omander and this is the show Root Access, a show
on Google Developers Live about startups.
And I'm joined today by Don Dodge, startup advocate,
longtime investor.
So Don, we did a show a couple of weeks ago about ownership
structure of your startup.
And we got a really interesting question from
Anthony Kelly.
Thank you, Anthony, for sending us a question.
He asked, what are some of the Do's and Don'ts for attracting
investors and getting the investors signed up?
And what are some of the mistakes you've seen, and what
are some the right ways of doing it?
DON DODGE: Well, you need to choose
your investors carefully.
Sometimes companies are so desperate for startup capital
that they'll take money from anyone who comes
at almost any terms.
And you do what you have to do, obviously.
But there are some things you need to
do to protect yourself.
So when you take money from an investor you need to be very
clear up front about what your long term vision is.
So, is this going to be a 12 months and we sell it and flip
it kind of business, or is this going to be a five year
kind of growth and development and
building users and revenues?
And what kind of expectations do they have?
So if you're clear with those kinds of expectations up front
it makes it a lot easier down the line.
So that's the first thing.
The second is to just think about the ownership structure.
Is it common stock?
Is it a convertible note?
Is it preferred stock?
So those are fairly generic terms.
What they mean is, common stock is just regular stock
that employees get.
So employees, when they get employee stock options,
they're getting common stock.
Investors, VC investors, when they invest they
get preferred stock.
Preferred means that it has preferences over the common
stockholders, typically in doomsday scenarios, like when
you're shutting down the company, or when the company
is being acquired, or those sorts of things.
They might have preferences.
MARTIN OMANDER: So, do they get paid
first if it shuts down?
DON DODGE: Yes.
MARTIN OMANDER: With the--
DON DODGE: So, preferred--
MARTIN OMANDER: --assets.
DON DODGE: Exactly.
Preferred means that they get paid first.
They get preference.
And if there's any money left over, it goes to the common
shareholders.
So that's fairly typical.
There are also convertible notes, which have become
fairly popular recently.
Convertible notes means that it's a loan that converts to
stock when you raise your next round.
So it's an easy way to raise money.
From a legal point of view, it can be a one
page or two page document.
It's very inexpensive to do.
And it just lays out, here's the money that
you're putting in.
It will convert to common stock or preferred stock at
the next round, when you raise your next round.
And typically it has a discount.
So you might have a 20% discount, where you put your
money in, and then some time later, when you raise money
for a VC, if that valuation is, let's say $5 million, and
you have a 20% discount, then your money
goes in at $4 million.
Because that's the 20% discount off the five.
So it typically has a discount.
Or it might have cap, meaning that you put your money in at
a cap of $4 million, and if this takes off like a rocket
and you raise money at $10 million, your money goes in at
the cap of $4 million.
So, in essence you get 2 and 1/2 times your money right
away from the first round.
So it's those kinds of things to look at with investors.
There are some other nuances that are only an issue when
things go wrong.
But when they do go wrong, you need to make
sure that your protected.
And that's where you have to get a lawyer and really
understand what each of those provisions say.
MARTIN OMANDER: So, you need the lawyer up front.
Then, when you get investors--
just so that you have the convertible note, or whatever,
set up correctly.
DON DODGE: Yes.
Lawyers do this every day.
So they know what provisions to put in there.
Startup entrepreneurs do it once in
their life, maybe twice.
So, it looks fairly simple, but there can be some catches.
So it's always good to have a lawyer who has done this
multiple times to set up the initial documents for you.
MARTIN OMANDER: Very good.
In a similar vein, are there Do's and Don'ts
about bringing founders--
co-founders on board?
DON DODGE: Yes, absolutely.
And it's a different set of issues, equally important.
Maybe even more important.
MARTIN OMANDER: Uh huh.
DON DODGE: So, you need to have they the same
understanding with your founders--
your co-founders--
that you do with your investors.
Meaning, here's what we're going to try to do.
Here is how long it's going to take to get there.
Here are the roles and responsibilities that each of
us are going to have.
Here's what we're going to contribute to the company.
Here's how we'll divide up the founder shares.
If you have three founders, it's not necessarily
33% for each one.
It could be that there's one founder who, they are the
technical genius and the vision of the company, and
they get 50% or 60%.
And the other two founders split the remaining 40%.
But you need to be very clear about that up front.
Second thing is, you need to have employment agreements and
IP assignment rights.
Sounds kind of strange to do that when
there's only two or three--
MARTIN OMANDER: Yeah.
Only two guys.
What's could happen?
DON DODGE: A lot could happen.
MARTIN OMANDER: Oh.
DON DODGE: If you don't have the IP assignments and
employment contracts, then they are free to leave the
company at any time and take their ideas with them.
So that's pretty dangerous for an investor.
If an investor comes in and says, OK, you've got an idea
and you've built it, and you have three employees.
What happens if one of your co-founders leaves?
And they can leave with the idea and
start another company.
They're going to want employment contracts, IP
assignment rights, and maybe in some states non-compete
agreements.
Those don't work in California, but there's
non-compete agreements that say that if you leave the
company, you can't do exactly the same thing at another
company for some period of time.
So there's a variety of issues that you need to face with
your co-founders very early on that are setting expectations
and protecting the company in case you leave, or protecting
the technology.
And again, a good startup lawyer can take you through
this in an hour or so and just make sure you're protected.
MARTIN OMANDER: So, lawyer early on to help with that
piece as well.
DON DODGE: Yes.
You need a lawyer for both pieces.
MARTIN OMANDER: Both pieces.
DON DODGE: To set up the company, to set up the
agreements with your co-founders, and also to set
up the financing documents with early investors.
MARTIN OMANDER: Great.
Thank you very much, Don.
DON DODGE: Thank you.
MARTIN OMANDER: I'm a developer as well.
And when I do development, I love to do it on
Google Cloud Platform.
It makes all management of your application much easier.
You don't have to deal with individual servers going up
and down and things like that.
Google takes care of all that.
We have a special offer for you, Root Access viewers.
You can get a $2,000 credit to start building your
application on the Google Cloud Platform.
And you'll see the details on screen.
And while you're trying that out, in the meantime, I hope
to see at the next show.
And keep those comments coming on YouTube.
We'll pick them up and deal with them in future episodes.
Thank you.
Bye.