David Cummings on Startups

Blog

  • Employee Equity in a Salary Multiplier Context

    Yesterday’s post titled Common Equity Grants for Startup Employees gave broad, simple amounts of equity for employees of a funded startup, which serves as a good starting point. In reality, things are much more nuanced with amount of salary being one of the biggest drivers of equity (e.g. more salary results in less equity). Another recommended way of determining the amount of equity for a position is to do it as a multiple of the market-rate salary in the context of the four year business goals.

    Here’s an example of employee equity in a salary multiplier context:

    • Employee position: $100,000 market rate salary for a software engineer with some experience
    • Startup raised $2 million on a $3 million pre-money valuation for a $5 million post-money valuation
    • Entrepreneurs decide the target equity goal for the employees is to make 2x their market-rate salary in value after four years (equity has four year vesting with a one year cliff)
    • Assume the startup doubles in value each year by executing well and growing revenue with these being example valuations (these are valuations, not revenue):
      Year 1 – $5 million
      Year 2 – $10 million
      Year 3 – $20 million
      Year 4 – $40 million
    • Assume 50% dilution from future funding rounds (so really need 4x their market-rate salary to get to 2x after dilution)
    • $200,000 as a percentage of $40 million is 0.05%
    • Double the 0.05% to account for dilution taking out half and you have 0.1% to start

    So a software engineer with a $100k salary would get equity amounting to 0.1% of the business for a startup that just raised a funding round, but still at an early stage. If the entrepreneurs wanted to offer a greater multiplier on salary, or if the business was more mature with respect to valuation, the percent ownership with be adjusted appropriately.

    What else? What are your thoughts on employee equity in a salary multiplier context?

  • Common Equity Grants for Startup Employees

    Dave Williams, the CEO of BLiNQ Media, posted some great comments on the Physical Atlanta Startup Village Idea article from a couple weeks ago. In one of his comments he argues that more young talent needs to be part of a big exit so that they can get a taste of what it’s like and participate in the upside of owning a piece of a startup. With that said, it’s important to understand common equity ballpark amounts for startup employees in the seed to early stage.

    Here are some equity amounts for common startup positions with near market startup salaries:

    • VP – 1%
    • Lead Engineer – .5%
    • Director / Senior Engineer – .25%
    • Manager / Junior Engineer – .1%

    Of course, equity grants need to be taken in context with salary, bonus, benefits, and other factors. Another key item is thinking through how much more dilution is likely based on future financings, as that will seriously impact the ownership percentages.

    What else? What are your thoughts on the common equity grant amounts for startup employees?

  • Strong Corporate Culture is Intentional

    Earlier today I had the opportunity to attend the Atlanta Business Chronicle’s 2012 Best Places to Work Awards ceremony at the Georgia Aquarium. A best places to work award ceremony is really a large celebration of business leaders that believe in the importance of corporate culture. My takeaway from the morning: a strong corporate culture is intentional.

    Here a few thoughts from the best places to work awards ceremony and winning company commentaries:

    • Employees are clearly put ahead of customers and investors
    • Shared values are critical (one winner said they look for people that are nice, passionate, smart, and fun)
    • Happy workspaces set the tone (an open, office-free environment was the recommendation from one winner)
    • Multi-year award winners are common, showing that intentional corporate culture continues indefinitely

    The next time you hear an entrepreneur talk about their great team, culture, or environment, there’s a good chance they’re intentional about making it great. Remember that corporate culture is the only sustainable competitive advantage that’s within the control of the entrepreneur.

    What else? What are some other thoughts on strong corporate culture being intentional?

  • Notes from salesforce.com, inc. 2003 S-1 IPO Filing

    The largest and most successful SaaS/cloud company, salesforce.com, inc. (yes, that’s the proper spelling of the company), filed their S-1 for an IPO on December 18, 2003. With the annual Dreamforce conference next week, and the fact that their market cap is now $21.5 billion (NASDAQ: CRM), a little trip down memory lane to see how things were nine years ago is on tap.

    Here are notes from the salesforce.com, inc. 2003 S-1 IPO filing:

    • Signed 8,000 paying subscribers from February 2000 to October 2003 and 110,000 seats (pg. 1) – SFDC now has over 110,000 paying subscribers and many millions of seats
    • May 2003 IDC reports project SaaS/cloud-based apps to be $2.6 billion in 2007 (pg. 1) – SFDC alone is going to be larger than $2.6 billion in revenue in 2013
    • Incorporated in Delaware in February 1999 and released first product in February 2000 (pg. 2)
    • Revenues (pg. 4)
      2001 – $5.4 million
      2002 – $22.2 million
      2003 – $50.9 million
      Nine months ended Oct 31, 2003 – $65.9 million
    • Losses (pg. 4)
      2001 – $33.6 million
      2002 – $30.1 million
      2003 – $9.3 million
    • Accumulated deficit – $71 million (pg. 4)
    • Small business customers have shorter contracts and higher rate of attrition (pg. 9)
    • Fiscal 2003 sales to Europe and Asia accounted for 14 and 17 percent of revenue, respectively (pg. 11)
    • Database software comes from Oracle Corporation (pg. 13)
    • Research and development expenses (pg. 23)
      2001  – $3.3 million
      2002 – $5.3 million
      2003 – $4.6 million
    • In December 2001 abandoned excess office space and took a $7.7 million charge (pg. 26)
    • Owned 64% of a Japanese joint venture (pg. 27)
    • Raised $61.1 million from investors in exchange for preferred stock (pg. 38)
    • $3.5 million letter of credit for office rent in 2001 (pg. 39)
    • 2004 office lease expense of $5.4 million (pg. 39)
    • 10,000 free Personal Edition users activated (pg. 47)
    • Application is written in Java and Oracle PL/SQL (pg. 48)
    • A small number of customers have service level agreements (pg. 50)
    • Field sales offices in more than 20 cities (pg. 51)
    • 412 employees as of Oct 31, 2003 (pg. 53)
    • Equity owned before IPO (pg. 72)
      Marc Benioff – 31.6%
      Halsey Minor – 10.2%
      Parker Harris – 2.7%
      Attractor Funds – 6.0%

    Similar to the Workday IPO filing in the summer of 2012, this salesforce.com IPO filing from 2003 is highly unusual in that it’s a SaaS/cloud company that raised an impressive amount of capital and reached IPO-level recurring revenue in a short amount of time. Salesforce.com sets the standard for SaaS/cloud software companies and shows no signs of slowing down.

    What else? What are some other thoughts on the salesforce.com 2003 S-1 IPO filing?

  • Example New Customer Usage Patterns

    Recently I was talking to one of the early employees of S1 Corp., a banking software company in Atlanta. S1 Corp started as the first online-only bank and pivoted into online banking software in the mid-to-late 1990s. Before being acquired by ACI Worldwide in February of 2012, S1 Corp. had a market capitalization of $577 million (NASDAQ: SONE). One of the many interesting things the early employee of S1 Corp. told me was how the first customers of the new online bank used the service.

    Here’s what new customers would do with their first online bank:

    • Send a $100 check to S1 Corp. to open an account (the minimum to start)
    • Month 1: The customer uses online bill pay to send $1 to themselves to see if the service works
    • Month 2: The customer uses online bill pay to pay for a non-critical monthly bill (e.g. lawn service)
    • Month 3: The customer uses online bill pay to pay for a standard monthly utility bill (e.g. electric)
    • Month 4: The customer uses online bill pay to pay all their bills

    This provides a useful example for entrepreneurs to think through and track how new users engage with a product. Product usage should be analyzed on a regular basis, especially new users of the product.

    What else? What are some other thoughts on the example new customer usage pattern?

  • Notes from Flashpoint Cohort 2 Demo Day 2012

    Today was Demo Day 2012 for the second Flashpoint cohort of startups and everything went well. Most of the teams did great and a couple were such recent pivots that it probably didn’t make sense to present. This class of startups was a bit different from the first cohort in that the teams were closer to idea stage at the start of the program compared to the previous set of teams that were further along when the program began. Regardless, both cohorts are excellent and some very successful companies will emerge.

    Techturized

    • Talk and shop for African American hair
    • Focused on hair care retail
    • African American hair care market is $3 billion per year
    • Life change = hair change
    • Moods: freedom, new reality, new person
    • Cycle of style
    • Working with Carol’s Daughter store
    • Raising money

    Pickoff Sports

    • Background in rivals.com and scout.com
    • Fantasy sports and March Madness
    • Pick teams that you think will win and earn virtual currency
    • Played right within Facebook
    • Habit loop that emails you how your picks did
    • Raising $500k

    CourseShark

    • Course registration is a big hassle
    • Solution is a modern frontend on legacy data
    • Students will share their course info with recruiters and companies
    • Help students get jobs
    • Georgia Tech students love it
    • FERPA blocks schools from sharing student courses

    Soccermetrics

    • Like Money Ball for soccer
    • Soccer data is not as developed as other sports data
    • Sourcing, analytics, decisions are separate companies
    • Key is making valuable information available fast
    • Have several sources of data
    • Product is an analytics engine

    Buzztastic

    • Help businesses market together
    • Cross promotions like sweepstakes or contest
    • Together marketing is a new category of marketing
    • Product is inherently viral
    • Raising $1MM round

    Deliverable

    • Freelancer verification to top employers
    • Huge number of people are now freelancers
    • Free-agent economy
    • Growing from 28% to 40% of work force

    SeeMove

    • Simple solution to track movement of moving boxes
    • 15% of population moves each year
    • $11,000 per interstate move
    • Logistics experience

    BeSmart Ventures

    • Maximize value of gift cards
    • $100 billion market
    • Growing 30% over next few years
    • Loyalty programs moving to phone
    • Breakage is unredeemed value – $7 billion in 2011

    The OR Standard

    • Inefficiencies in OR are wasting money
    • Delayed cases cost serious money and bad experiences
    • Solution is an intelligent communicator scheduler with checklists
    • Mobile app for doctors, nurses, patients, and patient family members

    Springbot

    • Marketing automation for ecommerce
    • Amazon.com functionality for SMB ecommerce sites
    • Ecommerce sites don’t know where to spend the next marketing dollar
    • Solution helps track ROI and provide marketing tools
    • Value in integrating disparate tools and tracking data
    • Business model of monthly fee with data fees
    • Already closed a $1MM angel round

    ScheduleLogicMD

    • Healthcare in US wastes $750 billing per year
    • Intelligent scheduling is in its infancy
    • Scheduler – receives calls all day
    • Different insurance companies have different payment terms and patients should be scheduled with that in mind

    Dwellio

    • Increase renter retention for apartment owners
    • 54% annual apartment turnover
    • Renter 50% more likely to renew if friend in building
    • Mobile app to help property managers interact with tenants
    • Raising $1.5MM

    We & Co

    • Talent management for service economy
    • 2 million service businesses in US
    • 70% turnover
    • $5,500 replacement costs
    • 30 million service professionals in US
    • Like LinkedIn for service professionals
    • Acquired 10,000 service professionals in last 90 days

    Vehcon

    • Smart vehicle connections
    • Usage-based insurance
    • Accurate odometer reading in vehicles is super hard
    • Odo-foot app takes pictures of odometer plus metadata
    • Deliver authenticated data with a fingerprint based on the car
    • $55 per driver per year

    I enjoyed the second cohort’s Demo Day today and I’m excited to see the startups grow and be successful.

    What else? What are some other thoughts on Flashpoint cohort 2 Demo Day 2012?

  • Atlanta Needs More $1MM in Annual Revenue Profitable Companies

    Earlier this summer, Chris Dixon wrote a blog post titled Shoehorning Startups Into the VC Model where he argues most startups aren’t appropriate for venture capital (similar to the 4 Reasons to Raise Venture Capital). Joshua Baer, founder of Capital Factory (startup accelerator program) and several successful startups, wrote a comment on the post outlining his strategy to grow the Austin-area startup community:

    The first thing I usually do when I talk to a startup about raising funding is to try and talk them out of it and provide alternative options (customers paying in advance is the best!). At Capital Factory, we are focusing on tech startups that can reach $1mm in profitable annual revenue on less than $1mm of funding. They can get all of that from Angels and many won’t ever need to raise more funding from VCs (and many will go raise more money).

    This is a great strategy and applicable to Atlanta as well. With so few startup exits in Atlanta each year, we need more focus on building companies that are profitable on $1MM in annual revenue with less than $1MM in funding. Once a tech company achieves profitability on $1MM in annual revenue, there are many more options available like growing organically without raising more money, raising more money (money is easy to raise when you’ve derisked the model by hitting the $1MM in revenue mark), or paying dividends to owners (something that should happen more frequently in markets that don’t have many exits).

    Atlanta needs more $1MM in annual revenue profitable tech companies with less than $1MM of funding to help grow the startup community.

    What else? What are your thoughts on the value of $1MM in annual revenue profitable companies?

  • 4 Reasons to Attend Flashpoint Demo Day 2012

    Flashpoint, the startup engineering accelerator associated with Georgia Tech, has its second Demo Day on Tuesday, September 11, 2012 at 2:30pm in Tech Square at the Flashpoint offices. With this being the second cohort of startups, Flashpoint is still in its early days but off to a great start under the leadership of Merrick Furst.

    Here are four reasons to attend Flashpoint Demo Day:

    1. Get a chance to hear from 14 of the most promising seed stage startups in Atlanta
    2. Learn more about lean startups, customer development, and startup engineering
    3. Meet investors, entrepreneurs, and executives in the Atlanta community
    4. Stretch your mind with some of the coolest and most interesting startup ideas

    If you can’t make the Atlanta Demo Day, Flashpoint will be in NYC and San Francisco later this month. I’m looking forward to Tuesday’s Demo Day.

    What else? What are some other reasons to attend Flashpoint Demo Day 2012?

  • SaaS Apps Can Learn from Casual Game Engagement Techniques

    One of the more common techniques to increase engagement and usage of casual games on the iPad is to provide goals or challenges each time the game is played. As an example, the three active goals in a game might be to beat your previous high score, get to level five, and purchase a digital item in the store. Some, like beating your high score, are context-sensitive and straightforward. Others, like purchasing a digital item in the store, are designed to increase the user’s engagement with different parts of the game, and set the foundation for in-app purchases.

    Software-as-a-Service (SaaS) apps should learn from this approach. In SaaS apps, it’s easy to automatically track what features are, and are not, being currently used. With this information, as well as analytics around what’s going on with usage of active features, the software could recommend new features to take advantage of as well as ways to get more value from existing features. Even better, data across multiple customers of the SaaS app can be anonymized and used for benchmarking, so that the recommendations give a context as well (e.g. you’re 5% below the average for this category and here’s what you should do to improve).

    Here are some example goals or challenges that a SaaS app might provide:

    • Create a new page called ‘about’ in WordPress
    • It takes you an average of 40 days to get paid, and for your type of business the average should be 35 days, according the QuickBooks app, so here is a best practices guide to improving payment turnaround
    • Try out our new commenting feature in a cell in one of your Google Spreadsheets

    The next time you’re contemplating ways to increase engagement and reduce customer churn, consider goals and challenges on the main application screen of the SaaS app.

    What else? What are some other things SaaS apps can learn from casual game engagement techniques?

  • Atlanta History: Notes from the ISS S-1 IPO Filing

    Internet Security Systems, easily the most famous and successful B2B Atlanta tech startup of the past 15 years, filed to go public in late 1997 with a target IPO date of January 20, 1998 (SEC filing for ISS Group, Inc. IPO). After a successful run as a public company, IBM bought ISS in late 2006 for $1.3 billion in cash (source: IBM.com). Being a connoisseur of the Atlanta startup and technology community, I wanted to learn more about ISS. SEC documents, like an S-1 filing, are some of the most honest and transparent business documents you’ll ever read.

    Here are notes from the 1997 ISS Group, Inc. IPO filing:

    • Proposed raising $31.6M (pg. 1)
    • Over 1,500 customers (pg. 3)
    • First product was distributed as shareware in 1992 and the business wasn’t incorporated until 1994 (pg. 4)
    • Selling 2,500,000 shares out of 15,878,428 shares total (pg. 4)
    • Revenues and employees (pg. 8)
      1995: $257,000 / 7
      1997: $13,467,000 / 141
    • 80% of revenue from the Internet Scanner product (pg. 9)
    • VCs bought 3,650,000 Series A shares (pg. 18) representing 23% of the business
    • VCs bought 2,086,957 Series B shares (pg. 18) representing 13.1% of the business
    • Channel partners receive discounts ranging from 35% – 50% off list price (pg. 21)
    • Accumulated deficit of $5.2M (pg. 21)
    • Gross margins (pg. 22)
      1995 – 98.4%
      1996 – 99.6%
      1997 – 95.0%
    • Strategy (pg. 29)
      – Continue leadership position in security technology
      – Expand domestic sales channels
      – Promote professional services capabilities
      – Expand international operations
      – Create category awareness
    • Field sales reps focus on opportunities that have at least $200,000 in deal value (pg. 36)
    • Management age at time of IPO (pg. 41)
      Tom Noonan – 37
      Christopher Klaus – 24
    • Christopher Klaus founded ISS in April 1994 and Tom Noonan joined in August 1995 (pg. 41)
    • VCs owned 31.1% of the equity after the offering (pg. 50)

    The ISS S-1 is fascinating to read as it is an example of a company that went public with a small amount of venture capital raised in a short period of time, something that’s no longer possible due to the much larger revenue requirements to be public along with costs related to Sarbanes-Oxley. Entrepreneurs interested in the history of the Atlanta technology community should read the ISS S-1.

    What else? What are some other thoughts on Internet Security Systems and their IPO?