Thoughts on startups by investors that
fund them & entrepreneurs that run them

Blog Archives

Thinner Slices of an Extra-Large Pizza: Mathematical vs. Economic Dilution of Startup Equity

Back from a hiatus, it’s time to venture forward once more.  I appreciated hearing from those who asked about upcoming posts.  Thanks in particular to the reader who reminded me that Part II of “Bored” of Directors Can Become Clash of Titans is still in the queue.

Let’s get right down to business: Dilution of founders’ and other early shareholders’ equity in

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Convertible Debt is Bad For Angels

A couple of years ago, Paul Graham (Y Combinator) tweeted “Convertible notes have won. Every investment so far in this YC batch (and there have been a lot) has been done on a convertible note.”

The truth is convertible debt has not won.  Many sophisticated angel investors and angel groups refuse to invest in convertible debt in seed/startup deals.  Why? 

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Convertible Debt: Worst Form Of Seed Financing — Except For All The Others

How to finance a new seed-stage startup?  Equity?  Convertible debt?  Convertible equity?

As of August 2010, Paul Graham famously proclaimed, “Convertible notes have won. Every investment so far in this YC batch (and there have been a lot) has been done on a convertible note.”  Yet in my little corner of Wonksville, Founder Institute CEO Adeo Ressi and Yoichiro “Yokum”

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Second-Class Investor Citizens: Facebook’s IPO and Dual-Class Equity Structures

Dual-class voting structures are receiving a lot of attention these days along with intense publicity related to the Facebook IPO, following in the wake of other recent tech IPOs with a similar structure such as Zynga and LinkedIn.  This is nothing new; long favored by family-controlled media empires such as Rupert Murdoch’s News Corporation, among Internet firms alone, Google took

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Amount of Startup Equity Depends on Contribution

One of the first tough decisions that startup founders have to make is how to allocate or split the equity among co-founders. The easy answer of splitting it equally among all co-founders, since there is minimal value at that point, is usually the worst possible answer, and often results in a later startup failure due to an obvious inequity.

Another

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The Problem with Private Placement Memorandums (PPMs)

The sale of equity in private companies is regulated by the Securities Act of 1933, which requires that the company either register with the SEC or meet one of several exemptions (Reg D).  A Private Placement Memorandum (PPM) is a special business plan defined to meet an SEC exemption.  In most cases, those entrepreneurs choosing to raise capital using PPMs

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Heart-Attack Tax Season for Delaware Startups

It’s that time of year again:  Tax season.  In addition to the headache of personal income taxes, entrepreneurs have to deal with business taxes.  Around this time each year, as sure as the sunrise, I get calls and messages from irate founders of new startups who received franchise tax bills from the State of Delaware for an insane amount like

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Rookie Cookies: Owning the Batter But Not the Chips

I’ve gotten on my soapbox before about the importance of forming a business entity as soon as there’s a new product or business worth protecting.  The most common messes encountered in my startup law practice involve founding teams that somehow never got the formation done right, including the contributions and assignments of intellectual property to the new company and the

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Sisyph.us? Fighting an Unwinnable Domain War

One of the best values a young entrepreneur can absorb early on is the value of learning from mistakes, both your own and those of others.  I’m constantly amazed at the extent to which experienced entrepreneurs and angels are willing to share their accumulated knowledge and wisdom, including some painful battle scars, with others.  This bedrock of Silicon Valley culture

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Limiting the Number of Shareholders in Private Companies

The US Securities Exchange Act of 1934, section 12(g), generally limits a privately held company to fewer than 500 shareholders. The assumption has been that companies with 500 investors are quasi-public anyway, and for disclosure and other reasons should be forced to go public when the shareholder number approaches this limit.