4 More Reasons Against Convertible Notes

This time last month I wrote a post titled 4 Reasons Investors Shouldn’t Do Convertible Notes. Today, Fred Wilson has an excellent post Convertible and SAFE Notes with more detailed reasons why he doesn’t like convertible notes. Here are his four reasons against convertible notes:

  1. Dilution (and valuation) is deferred to a later date and is too important to punt on.
  2. Notes make it harder for the founders to understand how much dilution they’re taking.
  3. Notes build up and it becomes more painful when a priced round actually happens.
  4. Founders often promise a percentage of ownership verbally to angels but then the notes don’t meet the expectations causing problems.

The solution is the same: price the round. Read Convertible and SAFE Notes along with the excellent comments to learn more.

What else? What are some more reasons to not do convertible notes?

Video of the Week: Snapchat’s three-part business model with CEO Evan Spiegel

With Snapchat going public earlier this month and having a current market cap of $25 billion (NYSE:SNAP) let’s hear from the Snapchat CEO. Our video of the week is Snapchat’s three-part business model with CEO Evan Spiegel. Enjoy!

From YouTube: The Snapchat frontman fielded questions on an array of tech-focused topics, including Snapchat’s three-part business, getting into content, age and audience, leadership role models, the inevitable IPO, the bubble, workplace diversity and those embarrassing emails.

Benefits of Raising Outside Capital

At Pardot we chose to not raise outside capital and experienced the Benefits of Not Raising Outside Capital. With that said, I’m on the board of several fast-growing startups like SalesLoft and Terminus, so I’ve had the chance to see the other side. Not raising capital — if you can do without it — does make things easier overall, however it also makes it significantly harder to “win” the market.

Here are a few benefits of raising outside capital:

  • Grow Faster – The number one reason entrepreneurs want to raise capital is that they see a chance to grow faster. Sometimes this is taking a model that’s already working and significantly expanding it. Sometimes this is investing ahead of expected revenue such that there’s an opportunity to scale faster and more efficiently. Regardless, growth is at the core of raising money.
  • Helpful Board of Directors – A board is more work and structure but brings with it a good rhythm of planning and review at a high level. VCs are usually on 6-10 other boards so they can bring best practices and recommendations from experiences across a variety of startups. Boards provide entrepreneurs with help and guidance in scaling the business.
  • Gain Marketshare – For most venture-backed tech startups, the game is to gain as much marketshare, and corresponding revenue, as fast as possible to either become a target for an acquisition or go public. While markets are rarely winner-take-all, they very much place a high reward on being the top three.
  • Great Expectations – Once you raise money the clock starts ticking to generate a return on investment. This is motivating for many entrepreneurs and helps them focus on building a large, valuable business. Entrepreneurs are often ADHD such that outside investors can be helpful as a forcing function on the desired target.

Raising outside capital should not be the goal for the majority of entrepreneurs. Only in rare circumstances should capital be pursued and these are a few of the benefits that come along with it.

What else? What are some more benefits of raising outside capital?

Benefits of Not Raising Outside Capital

In a few weeks I’m giving a talk to a group of entrepreneurs that have decided to eschew raising outside capital and focus on bootstrapping. With so much focus on TechCrunch and other publications about fundraising and venture rounds, it’s easy to get caught up in the belief that raising large amounts of capital is the only route. It’s not. Here are several benefits of not raising outside capital:

  • Flexibility – Businesses change. Trends change. Being independent provides infinite flexibility to change course and pursue the best new opportunities. With no board of directors there’s maximum flexibility.
  • Timeline – Without outside investors there’s no timeline on the business to sell after 5-7 years. Sometimes it doesn’t make sense to ever sell or there’s a desire to have a great cash flow business indefinitely.
  • Quality of Life – Being an entrepreneur is already stressful enough. Once the business is working, there’s the option to focus on quality of life and less on the company.
  • Expectations – With no investors there’s no expectation of building a large company at all costs. Expectations can be as high or low as personally chosen.

Overall, the biggest benefit of not raising outside capital is the ability to control your own destiny across every dimension. Control is what many entrepreneurs are seeking and not raising capital is the best route for that.

What else? What are some more benefits of not raising capital?

5 Recruiting Resources for Entrepreneurs

Several entrepreneurs have asked for links to other resources on recruiting after posts on the Top 3 Hiring Mistakes, 5 Non-Standard Recruiting Tactics, and 7 Non-Standard Interview Questions. Here are five recruiting resources for entrepreneurs:

  1. How Startups Can Build a Recruiting Machine by David Skok
  2. Post-Traction, You Need to Spend 20% of Your Time Recruiting by Jason Lemkin
  3. How to Improve Hiring at Startups by Mark Suster
  4. Why Recruiting Isn’t Over When an Employee Accepts Your Offer by Mark Suster
  5. Turbocharge Your Recruiting Machine — Here’s How by First Round Capital

Recruiting is one of the most important skills for an entrepreneur and needs the appropriate attention. Read these resources and learn from others.

What else? What are some other good recruiting resources for entrepreneurs?

Top 3 Hiring Mistakes

Alright, now that we have 5 Non-Standard Recruiting Tactics and 7 Non-Standard Interview Questions let’s talk about hiring mistakes. As much as we work hard to build an excellent recruiting and hiring process, mistakes happen. Here are the top three hiring mistakes:

  1. Sacrificing Culture Fit – When the hiring manager and team feels pressure to deliver, and few candidates are available, people start talking about sacrificing culture fit. Don’t do it. Everything starts with culture fit.
  2. Rushing the Process – Assuming you’ll be working with this person for the next 2-3 years (if not more), that’s thousands of hours. Don’t you think you should spend several hours with the person in the hiring process, especially if they’re a manager (see Chronological In Depth Survey Interviews)?
  3. Not Moving Fast Enough When Ready – Great candidates don’t hang around for long. Once you’ve finished the process, and it’s the right person, move quickly and seal the deal. Don’t linger.

Don’t make these hiring mistakes. Ensure culture fit, follow the process, and move fast.

What else? What are some other common hiring mistakes?

5 Non-Standard Recruiting Tactics

Now that we have the 7 Non-Standard Interview Questions from yesterday, let’s go up a level and talk about non-standard recruiting tactics. When an entrepreneur needs help with recruiting, I ask about their current tactics and it’s typically LinkedIn listings, job boards, and recruiters. Well, here are five non-standard recruiting tactics:

  1. Culture Blog / Engineering Blog – At Pardot we used to have a culture blog called Pardot Wave where Pardashians shared stories and experiences to help prospective employees better understand our culture. At Netflix there’s an excellent engineering blog called The Netflix Tech Blog that highlights many of their open source contributions.
  2. Sponsor Meetup Groups – Go to where the potential team members do their networking and continual education. For example, if recruiting for iOS developers check out The Atlanta iOS Developers Monthly Meetup.
  3. $10,000 Employee Referral Bonus – Don’t do the basic $1,000 employee referral bonus. For really hard to find positions, make the referral bonus substantial (it’ll still be much less than using recruiters).
  4. Public Career Fair – Host a happy hour at the local pub for anyone that’s interested in learning more about the open job positions. A casual group setting is a great way to meet potential candidates that aren’t ready to go through a full recruiting process but might be with a little more information.
  5. LinkedIn InMail from the Entrepreneur – Found a good candidate on LinkedIn but haven’t received a response? Have the entrepreneur reach out with a personalized InMail message expressing how much they’d enjoy getting together and start the process that way.

Recruiting is a serious endeavor that requires tremendous effort to do well. Run a process with the basics and incorporate some of these non-standard tactics as well.

What else? What are some other non-standard recruiting tactics?