VentureBeat

the invisible hand said:

Hmmm. Interesting article. Provokes a lot of questions for me…

“Tier 1 VC’s”? “Third-rate VC’s?” By whose standards?

“Invested money should all go to the company…” Who says? Who made the rules?

Ron’s viewpoint seems to favor the status quo, wherein the rich get richer.

I believe that the strength of US capital markets is one of our last remaining advantages in maintaining an edge in high tech.

Let’s let the market decide what’s fair…surely there are other workable financing terms - one’s that balance the interests of all stakeholders?

digital media guy said:

When everyone makes money together???

Give me a break Ron.

You get a big fat salary from your management fee so you take ZERO risk personally, then you get carried interest when the company the I build succeeds.

Meanwhile us founders/Execs take below market salary, no long term security, and sometimes make the initial seed investment.

It seems to me Ron doesn’t like the fact vc’s are competing for deals. Well that’s just too bad - it’s called an efficient market.

John Doe said:

I agree with some of the other posters, ron is being a unfair…

You Mon Tsang said:

Certainly plenty of reasonable people can argue for an early and partial payout for the entrepreneur.

Here’s how I think about it. A VC has appx 7-8 companies to hedge his bets over the course of one 7 year fund. Let’s say that VC lasts on average 2.5 funds, that means appx 20 companies he will fund in his career.

An entrepreneur has 3-4 companies in his entire career. Looking at odds only, a typical entrepreneur will be more risk-averse than a VC.

In order to align interests, if an entrepreneur gets a partial payout early on, then that person is more likely to swing for the fences, which is what the VC wants.

John Doe's Mom said:

One thing you’re all missing — once you give the entrepreneur some financial success, there’s a much lesser chance he/she is going to work even half as hard as before.

Charlie said:

@John Doe’s Mom… Yeah, because entrepreneurs never work hard after being successful once… look at how lazy those Skype guys are being with Joost, or how Dick and his team really mailed it in with Feedburner after 24/7. :/ The other side of this is that entrepreneurs, with a little money in their pocket, need not sell their business to Yahoo! for $25 million when it hasn’t reached its full potential yet… and can try for shooting the lights out and making a real dent in the market.

A. Smith said:

True “entrepreneurs” aren’t going to work less hard just because they’ve received some compensation for the sweat equity that they’ve already spent. I not only agree with the comments made that this trend won’t harm VC’s, i’d add that the market for venture capital is becoming more efficient in that these terms level the funding options for entrepreneurs. Most of the time the founders are replaced and/or let go altogether, this combined with the fact that most startups fail. This emerging scenario provides some payback to the founders who have likely sunk $$$ into the venture, while still providing the founders with incentive and resources to swing for the fences.

Well done to the entrepreneurs who have pioneered the FF class of stock.

Jeremy Wright said:

Ultimately when you’re raising a round you’re often simply issuing new stock. If, instead, people were able to sell a certain portion of their stock (say cap of 5% of the total pool, capped proportionately to ownership), then VC’s would get some value out (often up to 50% of their initial investment) and the management and team would as well.

As an example, you have a company that raises a 2M first round, and is going after a 10M second round. If 5% (500K) of that were to be shares bought from existing shareholders (this is, of course, assuming the VC’s can under the terms of their LP agreements and such, and without triggering drags and tags), then the team gets 250-300K.

That’s enough for most folk to pay off their debt, maybe get a slightly nicer car or put a downpayment on a house.

It’s not enough to demotivate a team.

But it is enough so that they aren’t distracted by their personal finances quite as much.

Still, to be my own devil’s advocate if a fund is offering founders millions in return for them closing the deal with the firm then, yeah, it’s kind of a bribe.

Just one more tightrope that VC’s and entrepreneurs need to walk. After all, it’s not that unheard of - even during the dry times post-bust.

John Doe's Mom's Hairdresser said:

How does this differ from other compensation?
Should the entrepreneur put his salary into the company? If you have an entrepreneur with experience or a deal that looks like a home run, and it is OK with general partner… what does it matter?

Are public companies the only ones who can incent with signing bonuses and other perqs to ’sweeten’ the deal? Have you looked at sport franchises recently? Free agency. I heard last night that LaBron James raised the Cavs franchise value by $158M. Do you think his owner regrets the comp he’s getting?

John Doe's Mom's Hairdresser said:

Crocodile’s tears, Ron

Chris said:

I agree with Ron’s point and I think there’s a difference between what he’s describing and the Founder’s Fund shares. The way I understood the FF shares is that it allows the entrepreneur to sell some of their ownership at the time a company does a follow on financing round. i.e. an option to sell some of your upside to “take some chips off the table” (and at the price established by the new financing.) This is different than new VCs coming in and saying we’ll pay you off personally if you let us in on the deal. The founder is giving up nothing- just accepting a bribe. I’d love to hear how a VC making such an offer to entrepreneurs justifies this strategy to their LPs. It is further evidence of the fact that there’s too much money in VC right now and with VCs who just don’t have high quality dealflow.

John Doe's Neighbor said:

After reviewing the various posts, i have to agree, there are “no hard and fast rules” about throwing a bone or two to the entrepreneurs who came up with the idea and are working their tails off to make the business succeed. VCs more than anybody should support efficient markets. I say, let the free markets work and quit with the no-fair tears.

Tim Jones said:

On another note, how freaking annoying is Kara Swisher as an interviewer? She wouldn’t let Ron get a full sentence out before interrupting him with some inane comment. Kara - we’re watching this video to see Ron, not you, so butt out! Print reporters need to realize that you can’t use the same techniques when creating a video report.

Matt Marshall said:

Chris, good point. I’ve updated with a reference to that.

anonymous said:

What is clear for an entrepreneur, is that circumstances will vary widely. If the venture proposed is worthy and the participants / founders are neither wealthy and have invested either their own money prior or very significant sweat equity to get to the table, it is far from unreasonable that they get more than stock and just being funded at the outset.

There are numerous examples where teams or individuals have given up considerable sacrifices of personal risks for sometimes little longterm or even in the short term, even just enough to survive prior related financial obligations.

If Mr. Conway doesn’t comprehend that some teams are not on as good a financial footing in the least (esp compared to his own circumstances) and this is ignored or swept away in the course of negotiations - with him delusionally thinking that everyone is perfectly fine, one has to rethink whether Mr. Conway is being in the slightest realistic.

Initial lump sum payouts, if any should ever be done, should be done reasonably, and reflect actual circumstances rather than be deal oriented / gaming the system.

It is important to view things from a greater perspective and in relation to the folks one is dealing with and their circumstances.

Early payouts at deal time are irresponsible if given to wealthy individuals, but not everyone is wealthy, and if Mr. Conway is disparaging of others of more modest means but worthy efforts, maybe he is not a top tier VC in the truest entrepreneurial sense of the word.

Arrogance and insensitivity do not reflect well on anyone, even if one does not milk a deal for all that might be unreasonably possible

The world is full of shades of grey, depending on one’s own vantage point and perspective.

Dan Malven said:

What some people are forgetting is that early-stage companies can be funded with TOO much money, and it makes the organization less capital-efficient and ultimately less focused and less successful. If to get a certain investor engaged with the company they have to put in enough money above their minimum threshold, you have two ways of doing that: a) the money goes into the company bank account or b) the money goes into the personal bank accounts of the executives (not as a bonus…but rather for selling some of their shares). In some instances you’d rather have the money with the founders instead of the company. It forces the company to focus and be capital efficient.

Yes, some entrepreneurs lose the edge when they make some money, but many companies lose the edge when they have too much money too soon. Many many many companies have failed because they were over-funded and spent too much on initiatives that were not on the critical path.

There is no one right or wrong answer to this, but you have to look at both sides of the issue: over-funding the entrepreneur and over-funding the company can both lead to problems.

Jeremy Liew said:

I’m a partner at Lightspeed Venture Partners and we have included a founder liquidity component to a small number of our recent financings. I certainly wouldn’t consider us third tier and neither would our LPs (my partners and I have funded companies such as Ciena, Blue Nile, Doubleclick, Brocade, Riverbed, Phone.com, Virsa, Rockyou etc - more at http://www.lightspeedvp.com).

Typically the circumstances of the rounds that have had a founder liquidity component have included:

1. Companies that don’t require much capital where we want to increase our ownership stake above investing what makes sense to go into the company
2. Companies that have established meaningful progress and been “de-risked” to some extent
3. Founders who have personal needs for cash driven by an external event (eg moving the business to California from a lower cost part of the world, getting engaged/married, having a family). Typically these are founders in their 30s vs founders in their 20s

I don’t consider these to be “bribes” or “payoffs” at all. When willing buyer meets willing seller I think thats called a marketplace.

I have a great deal of admiration for Ron and we are co-investors in several deals. However, I have to respectfully disagree with him on this point.

I posted about this topic on the Lightspeed blog in December - if you are interested you can click my name in this comment to read more

Deva Hazarika said:

“third-tier VCs are trying to get deals away from Sequoia and KP and offering entrepreneurs some cash”

http://www.inc.com/magazine/20070601/features-how-to-kill-a-great-idea.html

“Kleiner and Benchmark were, in fact, so eager to grab a piece of Friendster that they agreed to a highly unusual condition: a $4.7 million cash payout for Abrams.”

Ironic that Ron mentions KP in his quote.

a.vc said:

In general I don’t have a problem with this — it’s just VCs cutting themselves worse deals. This assumes they are still properly capitalizing the companies appropriately to reach their next major milestone(s).

It COULD be an issue, though, if the company were of a stage and size that there were lots of other common equity holders. It would probably have an adverse effect on company and team morale if they know that the founder just took down $1mm for their common at the expense of the dilution of the rest of the team’s equity (and without further capital into the company).

But in a very early stage deal where the situation isn’t yet too tricky with other investors, lots of employees, etc… it’s just the price of paying ball.

It could also be time to ring the bell on another cyclical peak in venture funding, because this kind of thing was also happening around 1999…

Rockwell said:

Partial cashing out of entrepreneurs is a great thing. It helps align the interests of the founders and the VCs. Ron’s just upset that VCs are losing leverage over entrepreneurs.

Vexed said:

If Ron truly believes that “everyone makes money together”, why doesn’t he drop all liquidation preferences in his deals?

Yobaby said:

The balance of power has shifted to the entrepreneur. Money doesn’t talk quite as loud, when you don’t need as much as you used to. My advice to Ron: suck it up.

John Doe's Neighbor said:

VEXED makes a good point. Crying foul because an entrepreneur is getting an early bone thrown to them is hardly on par with the “liquidation preferences” that are embedded in the investors’ term sheets. That evidence speaks volumes against the cry of “everyone makes money TOGETHER.”

limited partner said:

Perhaps Ron doesn’t like the competition for deals himself. What Ron didnt disclose is that he is a side fund participant in both Sequoia and KP. And less so in other funds. Pretty disingenuous and political on Ron’s part - largely because he is being competed against.

johnnycakes said:

And who ever thought that Ron Conway wasn’t political??

Rodey Rumford said:

Interesting comments here. I think that every deal needs to considered on an individual basis.

The bottom line is that whatever works best for both parties and ensures the best chance of success of the venture is what should be done.

As startup entrepreneur I see both sides of the fence; and sometimes the financial hardship that entrepreneurs suffer through and the havoc it can wreak on their spouses is sometimes a huge distraction.

Ramon said:

I’m half way with Ron and with the posts, it’s really risky being an entrepeneur and for the most part seed money needs to come out of our pockets. I don’t agree with payingoff deals because it’s not a brain buyout, but I think if VC’s want to get into great deals they’re better off doing more Angel investments into people and ideas as a project, not just a pretty site.

John Doe's Mom's Hairdresser said:

Great points all around - especially on the liquidity preferences… ;-) the key point I think is what is good for the investors is good for the entrepreneur — but also vice versa.

Too many times, the VCs take an adversarial role that actually affects outcome of the deal IMO — not taking the entrepreneurs needs into account.

A manifestation of portfolio management — too much herd instinct — it takes a special VC to nurture a deal. I know there’s a trend to reduce board participation. Maybe that will produce more of a “we’re all in this to make money” attitude.

Giancarlo Angulo said:

@John Doe’s Mom

I think what is really needed is some form of what Alan Greenspun calls Banker’s Instinct.

What I mean is it is the VC’s job to ascertain through whatever means he has if the founders are only in it for the money or the joy of making something approaching greatness. I believe when this is the case, early financial success wouldnt mean less hard work from the founder.

saul said:

I am seeking funding for my new internet company and would like to contact Ron Conway.
Does anyone have his contact info?

kent G anderson said:

To Ron Conway
My Name is kent G Anderson
I See the Word FUTURE as a Country and people and their ideas a Global Infranstruture .
Im president Founder sole priortor Of
http://www.futurevisionaries.com
Already years spent buidling The priroty
Global FUTURE brands Pend In all sectores in US ,UK, Europe .
I request that I be part of my ideas and brand FUTURE shared to help all people all countries ..I will move ..
Business Plann

Executive summary of business plan for buiding FUTURE

COMPANY’S OBJECTIVES
The vision of the company is to build name rights and a strong brand name identifying unique products, markets, services, and industries with special focus on inventions and ideas to build markets around those sectors. The goal is to build name rights in any marketing sector, to accrue franchising rights to identify the large marketing sector. The main goal is to build and to launch new industries, to test people’s ideas in any marketing sector, and to launch and invest these new ideas.
By identifying with the name FUTURE, the purpose is to build a major brand with a huge market where people can test their ideas in any marketing sector. Benefits are significant with a brand name that can include any industry, service and products. FUTURE is unique because of its ability to invest in consumers ideas and to launch new products and service industries identifying with the new industries. The name will be unique in identifying with the future, we will capture the market with people who want to identify themselves with the future. Other companies would not test their ideas in any marketing where their own brands don’t identify with every sector as FUTURE.

MARKET
The amount of dollars will capture in the millions because of FUTURE’S ability to own name rights, to have franchising ability, to have the ability to invest and market people’s ideas in any marketing sector; as well as, to build markets and to promote licensing of its own property and others who wish to be identified with the FUTURE name.
FUTURE rights are pending in the financial sector, retail sector, transportation services, entertainment, hotel and motel casino sector, museum, publication services, toys sector, industrial sector, research sector, health care sector, restaurant food sector, radio/TV broadcasting, online services, goods products sector, etc.
The target sector is for consumers, industries and markets of the world.

PRODUCT
The name FUTURE identifies many services, products and industries. Rights are pending. The name would represent new products, services and markets in restaurants, foods, designs, entertainment,etc. Franchising rights are being looked at; franchises must represent the goals, values, and the image of the foundation of FUTURE. The ownership will remain with the company. To be successful, revenues will come from franchising, licensing, marketing, partnering, patent rights, licensing rights and all services and goods that FUTURE will identified with as a means of revenue.

MANAGEMENT
Founder, CEO and managements if Kent G. Anderson, myself, at this time. The sole proprietor is Kent G. Anderson. The financier is myself and prospective
partners.

EXECUTION AND MILESTONES
I am a prolific thinker, inventor who holds may patents and many trademarks. My leadership, honesty and entrepreneurship qualities have cornered the market for the name of FUTURE in the Unites States.

FINANCIAL PROJECTIONS
Everything at the present is on paper and the development is at the starting stage with a strong foundation in securing legal rights. Financial projections are excellent with bring the company public in the future.

COMPETITION
I look at competition as potential partnering in selling services and products.

FUTURE COMPETITION ADVANTAGES
By securing the rights to the name of FUTURE in any marketing sector and identifying services which would include new products and services, the market for the name of FUTURE would corner the market by identifying with industries and services where inventions or ideas can be tested in any marketing sector. The advantages of FUTURE is the identification with the new not the old trademarks with concentrating efforts on people who don’t have the financial means but do have the ideas and ability to partner up with the companies. The reason for my existence is my forward thinking in that I have cornered the market with honorable goals. I have the belief in this huge dream and what it could accomplish with the launching of new product and with services that would benefit all people.

FINANCIAL REQUIREMENTS
A hundred-thousand to one million would be a start to keep paying ongoing trademarks, fees and protection of legal claims active to the large portfolio of FUTURE, to enforce the trademark rights, to stake claims in other countries, and to file for partners. The money would also be used to hire and find partners/investors. The money would be used for start up, legal fees associated with the indept marketing study and other expenses a business such as this would incur. The key is to hire a key management team, legal team and trustworthy professional people who have a fascination with the future and who understand the consumer’s needs.

PERSONAL CONTRIBUTION

I will contribute the leadership of this vision, my ideas, values of honesty, knowledge and goals. Can Move

CONTACT INFORMATION
http://www.futurevisionaries.com
Contact name: Kent G. Anderson
925 North Griffin
Bismarck, North Dakota 58501
701-223-0639
FAX NUMBER: 701-223-0639
milmntec@btigate.com

Dale Rogers said:

A Solution for Investors Prior to Investment:
The net of the discussion is of course that we are talking about a free market. The forms of “bribery” and influence are so varied and continuous that it is not intellectually honest to distinguish between cash on the table for a manager and soft forms of influence. If you are an investor and worried about the potential for a misalignment of interest with your manager, either stay out or make sure you have a legal control feature.

A Solution for Managers and Boards Right Now:
I have founder friends who complain about the Bay Area poverty of being a founder and I don’t fully buy it. I do agree however that creating more value and having that expressed in a new financing round is a clear milestone that the Board can compensate the manager for. What I did as an entrepreneur on this is to make cash bonus (and option grant) compensation tied to tangible performance milestones and have these cash bonus payments approved by the Board. Of course raising a new round with a big step up in valuation is not the end game, but it is clearly a milestone that can be compensated for.

Richard said:

Sorry I’m so late here. I stumbled onto this organized attack on Ron Conway’s character. Something that likely none of you know is that Ron is a great salesman. That is what makes him successful at what he does, he sells ideas.

Ron was born privileged, he’s always had security, but who doesn’t want that. But then, Ron has always been a risk taker and slugs that aren’t willing to do it on their own rely on the Ron’s of the world. Fortunately, Ron doesn’t have sense enough to be cautious, he just shoots for the hoop, not knowing if it will drop in. He’s a risk taker. If you don’t want him to take a risk with your money, then don’t give it to him.

Ron didn’t want his Angels Inc. investments to fail, just the opposite. But, everyone was caught up in the “idea on a napkin” craze during the dot.com boom. When things went bad for Ron et al, so did it for everyone in that market. The major mistake that investors made during the boom was investing in youth. The “youth” spent all their cash on marketing and used not to build revenue streams!

Henry Ford took a big risk on his black-only car. Bill Walsh took a risk in the skinny kid Joe Montana. Al Davis took a risk in an aging Jim Plunkett. Nolan Bushnell took a risk trying to sell the first great electronic games. IBM took a chance with Bill Gates and Paul Allen. A bunch of Omaha citizens took a chance on a guy named Warren Buffet. All risk takers.

Ron is a rich huckster. But, that is part of why I like him. He acts like he always needs to make a few bucks just to eat.

Ron also has a beautiful wife, inside and out, named Gail. He has beautiful kids. And they all read. I hope they didn’t read these negative comments.

I worked for Ron many years ago at Altos. I often felt I was a better salesman and manager than he was. But, I bought in to his enthusiasm and continued to learn from him, as did many of his friends who followed him into the unknown.

There is Ron the guy who made some bad investments and took the hit. And then there is Ron the good guy who loves his family, his friends, and is always trying to make another buck for himself and someone else. I guarantee you that people will still line up to take the next risk with Ron and pay for the privilege.

Lastly, I’ve seen Ron take the hits since the dot.com bust, especially with the sock puppet investment attacks. It’s sad that none of these critics know the man Ron. He’s basically a good guy. Privileged, wealthy, confident, caring, and even a bit arrogant. All the things that the less well off often wish for. But, in the end, Ron’s still a good guy and undeserving of the attacks.

“Let he who is without sin cast the first stone!”