SECTION I: STARTING A BUSINESS
#I
DAY 1
Course Introduction:
READINGS:
- Interview with Richard Branson in Inc. magazine: http://www.inc.com/oscarraymundo/richard-branson-young-entrepeneurs.html
 Everyone told him he would fail
 Entrepreneurs must keep momentum and not listen to nay-sayers
- Article written by an entrepreneur who puts things in perspective:
https://medium.com/swlh/how-quitting-my-corporate-job-for-my-startup-dream-f-ckedmy-life-up-3b6b3e29b318
 Having a support system is everything
 Can’t be highly concerned with reputations/what people think
- Q&A w/ partner from top VC firm re: what he looks for and taking risk:
https://www.nytimes.com/2017/10/13/business/corner-office-bryan-roberts-ofvenrock.html?emc=eta1&_r=0
 willingness to do really hard work is in much shorter supply than talent in the
universe today.
- Interview w/ Elon Musk re: dealing w/ naysayers:
https://www.youtube.com/watch?v=HxCH_lxQ4Nk
 Really emotional
DAY 2
Developing a Business Idea
4 Fallacies
 You need to be creative (Bloomberg book)
 You need industry experience
 Idea needs to be so unique it’s first of it’s kind (from supp reading)
 Idea needs to be perfect with no issues – false because your idea will change
and evolve
Types of new business ideas
 creating a new market vs. improving an existing one).
 Intellectual property considerations
o Ownership-who owns IP, license, cost of patents (search + filing)
o Themes
 Patent search expensive and not super conclusive
 There is value in having a patent application in
 Best way to protect your IP is to grow your business then you have
the resources
 Recommends trademark search
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Regulatory considerations.
o Certain industries have heavy regulations so it’s harder/more costly to get
into them BUT it means even giant competitors wanting to get in on them
have to go through the same process
Framework for Vetting
o Customer pain
o Winning- you need to beat competition at something
o Consider market opportunity
Forming an Initial Team:
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Importance and characteristics of value-added business partner(s) and key
employees.
o HQ people are EVERYTHING to startups
o Want a partnership where 1+1=3
o Look for complimentary skillset + shared values/character
o Sometimes it’s good to have an industry vet + visionary operator
Key considerations for structuring the participation of business partner(s) and key
employees – equity/options, vesting, and tax implications.
o Important roles and responsibilities
 Front person, operator, sales/ BD, hiring/firing
 Equity/ownership
 Founders Shares
 Vesting (keeps employees engaged
o Gives time to evaluate everyone’s performance
Thoughts on initial Board size and composition.
o Don’t give up a board sear unless you absolutely have to
o You ALWAYS want to control board (Alley Watch Article)
Advisory board: what makes a valuable advisor and how is their participation
structured?
o No legal liability for AB members
o Gives startup credibility
o Huge Advantage that’s relatively easy
Establishing a Legal Entity (didn’t get to this section today):
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Different entity types and the advantages / disadvantages of each.
Business and Legal considerations.
Future capital raising implications.
Readings for class:
- Bagley, Constance E. and Dauchy, Craig E. The Entrepreneur’s guide to Business
Law (Chapter 4 re: form of legal entity and Chapter 5 re: structuring ownership, pp. 7778 and 88-96).
- “7 Mistakes to Avoid in Forming a New Venture Board,”
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AlleyWatch.com, http://www.alleywatch.com/2018/07/7-mistakes-to-avoid-in-forming-anew-venture-board/
- Read Supplemental Reading 2 (on Canvas)
DAY 3
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Guest Speakers
DAY 4
Business Plans
HOW ENTREPRENEURS CAN CREATE EFFECTIVE BUSINESS PLANS
Business plan- A business plan to me is a 25-page, maximum 30-page, document,
which is a description, analysis and evaluation of a venture that you want to get funded
by somebody. It provides critical information to the reader — usually an investor —
about you, the entrepreneur, about the market that you are going to enter, about the
product that you want to enter with, your strategy for entry, what the prospects are
financially, and what the risks are to anybody who invests in the project.
• Components
o executive summary that grabs the attention of the potential investor.
This should be done in no more than two pages. The executive summary is
meant to convince the potential investor to read further and say, “Wow!
This is why I should read more about this business plan.”
 Most Important- do it last
 Most important part- Value proposition
o revenue model- reoccurring (getting paid periodically over time
generally until it’s canceled)
o market analysis. What is the market? How fast is it growing? How big is
it (size) ? Who are the major players? Dynamics? Is power concentrated
or diffused? Margins in the market – stable or shrinking? Barriers to
entry?
 VC wants to know they at least have a potential chance of making
10x’s the money
 Even if no competition yet- what will people do if you’re sucessful
o strategy section. It should address questions such as, “How are you
going to get into this market? And how are you going to win in that
marketplace against current competition?”
o marketing plan. Define the market. How are we going to segment the
market? Which parts of the market are we going to attack? How are we
going to get the attention of that market and attract it to our product or
service?
o management team- better have a robust slide, includes advisory board
o implementation plan. How to get to a to b to z? Timeline/milestones.
Develop project, introduce beta, customer feedback, regulatory approval,
sales milestones, key hires
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o operations plan that answers the question, “How are we going to make
it happen?” And you need an organization plan, which shows who the
people are who will take part in the venture.
o set milestones key events that will take place as the plan unfolds. What
are the major things that are going to happen? If your plan happens to be
about a physical product, are you going to have a prototype or a model? If
it happens to be a software product, are you going to have a piece of
software developed — a prototypical piece of software? What are the key
milestones by which investors can judge what progress you are making in
the investment? Remember that you will not get all your money up front.
You will get your funds allocated contingent on your ability to achieve key
milestones. So you may as well indicate what those milestones are.
 Risky because if you don’t get your valuation things will be set back
o key risks- hard-nosed assessment of the key risks. For example, what are
the market risks? What are the product risks? What are the financial risks?
What are the competitive risks? To the extent that you are upfront and
honest about it, you will convince your potential investors that you have
done your homework. You need to also be able to indicate how you will
mitigate these risks — because if you can’t mitigate them, investors are not
going to put money into your venture.
o financial plan where you basically do a five-year forecast of what you
think the finances are going to be — maybe with quarterly data or
projections for the first two years and annual for the next three years.
 Fogel Rule- prepare good faith estimates, figure out runway, then
go back, cut profits by half and double costs.
 Be conservative- on receipt of revenue (i.e. build in delay)
 Putting money in- makes a big difference to investors
o pro forma financial statements pro forma profit and loss statement.
You need a pro forma balance sheet if you have assets in the balance sheet.
You need to have a pro forma cash flow. Your cash flow is important,
because it is the cash flow that kills. You may have great profits on your
books but you may run out of money — so you need a pro forma cash flow
statement. And you need a financing plan that explains, as the project
unfolds, what tranches of financing you will need and how will you go
about raising that money.
o financial evaluation that tells investors, if you make this investment,
what is its value going to be to you as an investor. That is basically the
structure of the plan.
o Summary terms of the offer- investors need to know what kind of
security they are buying, valuation, termso exit plan/opportunity- helps investor see if there’s an alignment of
interest, what types of buyers
o legal considerations- disclosure, is IP protected, is it owned by a
company? Funky corporate org structure? Self-interested transactions?
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convince stakeholders (articulate and satisfy the different perspectives of various
stakeholders)
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show that we understand the needs — the unmet needs — of potential
customers.
o we need to understand the strengths and weaknesses of the current most
competitive offering out there.
o we need to understand the skills and capabilities that you and your team
have as entrepreneurs.
o understand what the investors need to get out of their investment,
because they have to put their money in and they need to have some kind
of sense of what they are going to get in terms of returns.
o In addition, the investment needs to be competitive with alternative
investments that the investors might make.
What it needs to do
o First and foremost-for YOU-to prepare you to launch you into business
o convince the reader that there are customers out there who will in fact buy the
product — not because it’s a great product, but because they want it and they
are willing to pay for it.
o convince the reader that you have some kind of proprietary position that you
can defend.
o convince your readers that you have an experienced and motivated
management team and that you have the experience and the management
capabilities to pull it off.
o convince potential investors that they are going to get a better return than they
could get elsewhere, so you need to estimate the net present value of this
venture.
o show that the risk they are taking will be accompanied by appropriate returns for
that risk.
o you need to be able to articulate all these issues in some 25 to 30 pages.
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1- concept statement- A concept statement is about three to five pages that you put
together and share with potential customers or investors just to see if they think it’s
worth the energy and effort of doing more detailed work.
• a description of the market need that has to be fulfilled;
• a description of the products or services that you think are going to fulfill that
need;
• a description of the key resources that you think are going to be needed to
provide that product or service; a specification of what resources are currently
available;
• an articulation of what you think the risks are;
• and then a sort of rough and ready estimate of what you think the profits and
profitability will be.
2- Customer conversations
3- Feasibility analysis- 15- to 20-page. This means we are now going to take this idea
to the next level. We’ve learned from potential customers and distributors. We’ve
learned who the major competitors are. We’ve shaped the idea more clearly, and now
we’re digging deeper.
• what evidence do you have that the market actually wants it?
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Tips
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Who do you think would write a check for your product?
You need to articulate what makes your product or your service feasible.
What has to be done in order to make this thing real?
You need a description of how you intend to enter the market,
a description of who the major competitors are,
a preliminary plan — a very rough plan — which specifies what you think your
revenues and profits are going to be,
estimate of what you think the required investment will be.
Go out and speak to potential customers
o What dissatisfies you about your current offering
o Who is providing alterntive
Discovery-driven Planning
READ SUPPLEMENTAL READING 3 (ON CANVAS)- PREPARE FOR THE WORST
Stress Tests
1- What happens if everything goes right
2- If I remove one piece that’s central to the functionality of my business what happens?
3- Is my business valued?
4- What’s the worse thing that could happen
THE SPECTACULAR DOWNFALL OF ELIZABETH HOLMES AND THERANOS IS THE BEST STARTUP
CAUTIONARY TALE IN YEARS. HERE'S WHAT YOU SHOULD LEARN
1. Don't over promise and under deliver.
2. Trust but verify.
a. The best entrepreneurs I know do as much digging on their financial
partners as their investors do on them
3. Don't raise too much money.
4. Say yes to no men and woman
Bagley, Constance E. and Dauchy, Craig E.
The Entrepreneur’s guide to Business Law
(Chapter 7 (pp. 157 - 162 only) and Chapter 13 (pp. 464-465 only) re: business plans).
Chap. 7 Pitching to Investors
Describe the Company
Describe the Product and the Market
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Strengths and Weaknesses of the Management Team
Identify Risks (including relationships)
Describe the Competition
Avoid Unsupported Statements
Prepare Backup File
ROGERS, STEVEN. -ENTREPRENEURIAL FINANCE
(CHAPTER 2 RE: FINANCIAL STATEMENTS AND CREATING PRO - FORMA PROJECTIONS).
Income Statement (profit and loss statement)- company’s profitability
• Flow of resources over time, shows revenues and expenses (dif is net income)
• Margins
o GROSS --Revenue-COGS
o OPERATING – (COGS+ operating expenses)
o NET – (Difference between revenues and ALL of the company’s costs)
Balance Sheet- financial condition of company at a particular time
• Snapshot of company’s assets, liabilities, stockholder’s equity at a particular time
• Shows assets, liabilities, and equity
Statement of Cash Flows• Cash sources – cash uses = net cash flow
Pro Formas
• Figures for 3 yrs
• 3 scenarios (best, worst, most likely)
SECTION II: RAISING CAPITAL
#II
DAY 5
FUNDING
*See table
Cryptocurrency Mania Fuels Hype and Fear at Venture Firms
• ?
CarGurus' IPO proves you don't need early venture funding to succeed on Wall Street
• A Boston-based tech company that hadn’t raised any money from venture capital
until ten years after its founding staged a successful initial public offering
Thursday — a reminder startups don’t need to raise huge amounts of cash from
Sand Hill Road to succeed.
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How Crowd-Funding Is Changing Everything and What That Means for Your Startup
• Two main models for crowd-based financing
o rewards-based crowd-funding
 PRO- work well as a step towards de-risking customer demand and
building a community of early adopters without giving up equity in the
business.
 CON- There can be a disconnect in your ability to deliver to those
expectations
o equity-based crowd-funding
 PRO- broad range of investors, savvy investors to provide feedback and
connections that you can use to shape your trajectory
 all of that money is combined into one pool and treated as though it
came from a single traditional VC firm on the cap table
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• "That is actually the best time to fundraise, with early winds at your back, and we have
learned that startups at this point are best able to leverage crowd-funding.”
• Rewards Based Best Practices
o Setup a strong feedback loop
o Keep running your company
o Expect customers to be customers
o Set a price point
o Do your recon
• Equity Based Best Practices
o Know who you are working with
o Be ready
o Clarity is king
o Cover the key points
Is Outside Capital an Option?
Venture Deals Chap. 8 (pg. 69) – CONVERTIBLE DEBT
E’s Guide to Business Law- Raising Money and Securities Regulation Chap. 7 (pg. 36)
NOTES:
Types of Capital:
 Common Stock- most basic equity shareholders can get
Founders stock
 Preferred Stock- dividends (distributing profits to shareholders) , gets paid first
• Used to entice investors
• Dividends (cumulative or non cumulative)
• Conversion rights: the PS will convert to CS at the option of the holder
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Before IPO- everything turns to CS
Liquidation Preference
o Upon a liquidation, after all the debts paid, preferred holder gets back their
investment amount + their accrued and unpaid dividends
• Participating vs non-participating stock
o Participating Preferred: dream for investors, nightmare for entrepreneurs
 Best of all worlds- get liq preference & participate in profits of what’s
left
Convertible Notes
• Postpones valuation
DAY 6
WRAP UP FROM LAST CLASS
In Section 2 of class: Raising Capital
Types of Investors
Ways of Investing
SAFE- Simple Agreement for Future Equity
 Really hot right now
 Similar to convertible debt- but equity
 A Warrant (to buy stock) for third-parties
 Gives investor right to convert into actual equity of the company
 Investors aren’t getting interest payment b/c not debt
 Avoids concept of “maturity day” b/c not debt (inventors loose leverage of maturity
date)
Legal Considerations:
Securities- if you have a security and you’re offering them to the public, then the default is you
have to register those securities to the public but there are exceptions. (Example- rule 701 is an
exception for employees but doesn’t take into account the “gig” economy)
Disclosure Q’s:
How many people?
How sophisticated are the people?
How are you marketing it?
Documentation- Terms Sheets, PPM, Stock Purchase Agreement
AKA- you have some primary document that lays out what you are getting, and says
how much you are investing, how many shares/units you’re getting, accredited investorbased on income level/assets are you of a sufficient wealth to quality as an AI and
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therefore you’re able to participate in an exempt offering (don’t need to know all the
requirements)
TERMS
Valuation – pre and post money valuation; balancing the need for capital vs. dilution;
interplay of liquidation preference, preferred stock terms and option pool.
Board seats, protective provisions, and “control.”
Vesting and Milestones.
Rights associated with selling and buying shares: tag-along, drag-along, ROFR,
preemptive rights, registration rights, anti-dilution terms, etc.
Term Sheet Process / Exclusivity.
Rando:
 Remember: as an entrepreneur you do not want participating preferred
 You always want numerous options for investors
o Don’t count on your one term sheet
 Investors goal is to mitigate risk and maximize return
 Pre-Money valuation vs. Post-money valuation
o 10mil valuation, investor gives 5mil
 Pre= 5/10th
 Post= 5/15th
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Canvas Reading 5 – “Nothing is Standard”
“I never ever say that a specific provision is “standard”. Nothing is standard. You
either need it or you don’t. Explain why you need it and most of the time you’ll get
it or something like it as long as both sides really want to make a deal.”
“I don’t give a f>>>k that you always get this provision. Doesn’t mean shit to me.
This deal will be the first time you don’t get it if you don’t explain why you need
it.”
Bagley, Constance E. and Dauchy, Craig E. The Entrepreneur’s guide to Business Law (Chapter
13 re: venture process and terms). Pg. 88
Deciding whether to seek venture capital
 $1-$3 million
 Look for liquidity in 3-5 years
 PROS- grow more quickly, secure more patents, higher market share, do better if
they go public , 90% of new biz w/ no VC fail in a year, only 33% w/VC fail
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CONS-drive harder bargains on pricing & terms, may assert more power in
molding the enterprise, may try to take over if entrepreneur stumbles
Common Business Plan for VC pitfalls
 Plan is too long
 Executive summary is too long
 Opportunity is too small
 Poor organization
 Plan lacks focus
Feld, Brad and Mendelson, Jason. venture deals (Chapters 3-7)
3. Overview of Term Sheet (pdf pg.2)
VCs care about: Economics + Control
Economics = ROI
 Preferred stock terms:
o Dividends
 Higher rate (good for investor/ bad for founder)
 Cumulative (good for investor/ bad for founder)
 Compounding (even better for investors/ worse for
founder)
o Liquidation Preference
 1x’s money, 2x, 3x
o Participating Preferred
 Always good for investors- very bad for founders
o Option Pool
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Control = mechanisms to affirmatively exercise control OR veto
4. Economic Terms of the Term Sheet (pdf pg.4)
Price / number of shares
Option Pool
Cap Table
Founders
Investors
Option Pool – amount of stock available for ee’s to incentivize
people to
Warrants
Fully diluted shares outstanding
Have to think numerator…not denominator
Raises questions about what happens if employees stocks (in the option
pool) haven’t vested
What Investors
Fully Diluted SharesNormally Are Given
Option Pool
Founders
900
900
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Investors
Option Pool
Warrants
100
1000
100
50
150
1200
5. Control Terms of the term sheet (pdf pg.32)
Generally share-holders vote on an as converted basis
So if you’re valuation is 1/3 you generally get 1/3 of the vote
Protective Provisions
Rights investors negotiate for that would allow them to block things
they’d otherwise not have enough votes to do
Examples:
 Issuing new stock
 Going Public
 Selling the company
 Management Changes
 Hiring/Firing Key EE’s
 Borrowing $$ above a certain level
 Declaring or paying dividends
 Board Seats (board sets strategy of company and hires officers)
o Professor Tip- BOARD SEATS ARE SO IMPORTANT
 HOLD ONTO THEM
 Maybe instead give up advisory board seats or
observer seats
o Sometimes split 2 founders, 2 investors, 1 mutually agreed
upon neutral
 As a founder-NO you want to control that board
b/c you want to control the direction of the
company
 “mutually agreeable” = VETO right for investors
6. Other Terms of the Term Sheet (pdf pg.45)
7. The Capitalization Table (pdf pg.60)
TERMS HIGHLIGTED BY FOGEL
Milestones
 Scary for founder because if you don’t hit them, investor may have rights
 Avoid if you can
Founder/ maybe Employee vesting
 Fred Wilson’s piece on pros/cons of making founders vest over time
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Redemption Rights
 Professor says this one is a nightmare
 Often overlooked but VERY important
 Right to make founder buy back investor’s shares at some predetermined formula
Anti-Dilution
 Automatic
o Like a stock split
 Pre-empted rights
o “If you do a future offering, I want to maintain my percentage so I get to buy up
to my %”
o Investors have to put more money in, but maintain percentage of ownership
o A way to adjust ownership back to percentage down to the next round’s lower
valuation
Registration Rights
 If IPO shares need to be registered and available for purchase
Right of First Refusal
 Way of saying if you wanna sell your stock, you can, but the same price and terms you
reach with new buyer have to be offered to me first
Tag Along Rights / Drag along rights
 Tag Along (good for investors)
o When common stock holders are selling, preferred shareholders get to sell their
stocks at the same terms
 Drag Along Rights (bad for investors)
o If the majority of the investors
Information Rights
 What information rights do investors have?
o Financial Statements
o Periodic Reports
Exclusivity
 You ask for term sheets, investor gives you a term sheet, gives you 30 days where you
have to negotiate exclusively with us
o Investor wants good faith exclusive negotiations
Is a term sheet binding?
 No, they aren’t binding
 Will usually say “this is all subject to final investor approval”
DAY 7
Guest Speakers
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SECTION III: EXECUTING / SCALING THE BUSINESS
#III
DAY 8
Scaling & Surviving
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Culture – the importance of culture to the success of a business.
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People – attracting and managing quality people and related employment issues.
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Product – developing products and markets; determining product readiness and
market fit.
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Sales – leadership and organization.
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Marketing – building and executing a go-to-market strategy.
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Growth – using data to deeply understand your business and grow it.
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Revenue & Profits – what's most important?
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Cash Flow Management – keeping enough gas in the tank.
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Adaptability & Perseverance – necessary tools for surviving the startup phase
and moving to a going concern and beyond.
Governance & Additional Capital:
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Building accountability.
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Relationships with Board and investors.
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Need for additional financing – options and considerations.
Organic vs. Inorganic Growth:
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Benefits/Negatives/Difficulties of add-on acquisitions.
READINGS
“The Defining Elements of a Winning Culture,” Harvard Business Review:
https://hbr.org/2013/12/the-definitive-elements-of-a-winning-culture
Culture is more than just a unique identity, however. The best performing companies
typically display a set of performance attributes that align with the company’s strategy and
reinforce the right employee behaviors. Our research revealed seven of these:
1. Honest. There is high integrity in all interactions, with employees,
customers, suppliers, and other stakeholders;
2. Performance-focused. Rewards, development, and other talentmanagement practices are in sync with the underlying drivers of
performance;
3. Accountable and owner-like. Roles, responsibilities, and authority all
reinforce ownership over work and results;
4. Collaborative. There’s a recognition that the best ideas come from the
exchange and sharing of ideas between individuals and teams;
5. Agile and adaptive. The organization is able to turn on a dime when
necessary and adapt to changes in the external environment;
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6. Innovative. Employees push the envelope in terms of new ways of thinking;
and
7. Oriented toward winning. There is strong ambition focused on objective
measures of success, either versus the competition or against some absolute
standard of excellence.
Few organizations exhibit all seven of these attributes. But high-performing
organizations typically spike on the three or four that are most critical to their
success.
“The Fall of Travis Kalanick Was a Lot Weirder and Darker Than You Thought,”
Bloomberg BusinessWeek, https://www.bloomberg.com/news/features/2018-01-18/thefall-of-travis-kalanick-was-a-lot-weirder-and-darker-than-you-thought
Blumberg, Matt. Startup CEO (Read Part Two: Building the Company's Human Capital)
 Key elements of running the people side of a company
o Team Building
o Culture
 Let people be people / work life balance
 Trust
o Full Cycle of Employment
 Recruiting
 Selling your vision
 Start with generalists willing and able to take on dozens of
tasks
 Pay attention to cultural fit
 Find outstanding specialists
 Complement your weaknesses
 Don’t hire up TOO much
 Check references carefully
 Let your team have input on your team
 Need a paranoia and an optimism
 Roles
o Consider hiring HR (by 100 ee’s too late)
 TOOLS
o Values
o Use people from old jobs
o Your team
o Company’s reputation
o Sales skills
 “what do you think of our business/company?”
 Let the candidate lead the interview process
 Hiring
 Defining Job properly
 Takes a lot of time
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Hiring doesn’t end on employee’s first day
Most can be forecasted
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Onboarding
 Start before Day 1
 Set up their new desk in advance
 Prepare an orientation deck for Day 1
 Clearly set 90-day objectives and goals
 Run a review process at the end of 90 days
Feedback / performance management
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Compensation
 3 elements of SU comp
o Base Pay
o Incentive Pay
o Equity
Promoting
 Not everyone who is good at their job would be good at
managing
 Peter Principle “people are promoted to their level of
incompetence”
 Think about “title inflation”
 Consider thinking of every senior member of an org as the
“head” of something
Rewarding
 It NEVER goes without saying
 Humans live for “moments”
 Culture of appreciation
Firing
 No one should ever be surprised to be fired
 Alert EE, Institute a performance improvement plan, radically
increase supervision of at-risk employees
 Layoffs suck (cut earlier, deeper, get rid of ALL poor
performers, plan talking points, follow layoffs with an allhands meeting)
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Collins, Jim. Good to Great (Chapters 3, 5 & 8)
 3- First Who…Then What
o Purpose of comp not to incentivize behavior- but to get the right people on
the bus
o Don’t be a Leader with a thousand helpers
o Be Rigorous with people
 When in doubt don’t hire—keep looking
 When you know you need to make a people change- act
 Put your best people on your biggest opportunity not your biggest
problem
 Good people will preform regardless of incentive
 Incentives won’t change the wrong people
 5- Hedgehog Concept (simplicity within the Three Circles)
o Hedgehog Concept is an understanding of what you can be the best at
(not a goal or a plan)
o Be a hedgehog – know “one big thing” not a fox “crafty, cunning, know
many things but lack consistency”
o Must set goals and strategies based on understanding – not bravado
o Counsel can help
o To get insight into drivers of your economic engine find the denominator
(profit per x, social sector, cash flow) that has the single greatest impact
 8- Flywheel and the Doom Loop
o No single defining action that turned company great
o Sustainable pattern of buildup and breakthrough
o Deals are often done because they’re exciting not because they make
sense
o Should be done ONLY as an accelerator of the flywheel
Horowitz, Ben. The Hard Thing About Hard Things (pp. 57-67, 91-104, and 119-129)
SURVIVAL
 Keep death in mind at all times
 When things are going wrong “Nobody cares” you just have to fix it
 “The Struggle” Chapter pg. 60
o Don’t put it all on yourself as the founder/CEO
o “This is chess, not checkers” issues are complicated
o Thinking that you’re the only one that can handle bad news is wrong- most
people handle news better than Founder
 Absolute necessity to watch cash until you break even
 Every day you’re not breaking even, is a day closer to running out of cash and
failure
 When raising money, raise more money than you think you need (cushion)
o Worst case-bit of dilution
17


o Avoid failing
Hard to bring in BIG people to small companies
o Less scrappy, rely on staff and resources to help them do their job, not a
player coach
When things go badly managers often blame outside facts
Supplemental Readings 7: Jeff Bezos
 Don’t worry about the money
 Forget output focus on input
 Be a leader not just a decider
 Even as you grow find ways to stay small
Supplemental Readings 8: Create a Thriving Team
Supplemental Readings 9: Equity Comp
 “I don’t have any specific recommendations to make on this topic except that
Boards should be thinking way more deeply and creatively about this issue than
we are. We should be confronting the true cost of this practice and asking
ourselves if it is best for our employees, and if so, which ones, and if it is best for
our companies and our shareholders.”
Supplemental Readings 10: Keep The Degree Of Difficulty Down
 In many sports, like diving, gymnastics, skating, etc, the way to win is to perfectly
execute a high degree of difficulty move.
 In startups, I advise founders to avoid that way of thinking and try to execute a
simple dive and hit the water perfectly.
___________________________________________________________________
SURVIVAL
Horowitz Piece
 Keep death in mind at all times
 When things are going wrong “Nobody cares” you just have to fix it
 “The Struggle” Chapter
o Don’t put it all on yourself as the founder/CEO
o “This is chess, not checkers” issues are complicated
o Thinking that you’re the only one that can handle bad news is wrong- most
people handle news better than Founder
 Absolute necessity to watch cash until you break even
 Every day you’re not breaking even, is a day closer to running out of cash and
failure
 When raising money, raise more money than you think you need (cushion)
o Worst case-bit of dilution
o Avoid failing
18
FINDING PEOPLE:
 Bus Analogy - “WHO is on the bus”
o First (before finding out where bus is going) decide WHO is on the bus
o Getting right people on the bus and in the right seas
o The right people WILL preform
o Right people
 Easier to manage
 More adaptable
 More motivated
o Horowitz: People  products  profits
o Incentives- used to get people on the bus, but can’t make the wrong people
preform
 OUT of Central Casting
o Important to ignore the traditional pedigree of someone (and the propensity of
management to follow the pedigree)
o IGNORE School, industry experience
o INSTEAD look at character, integrity, personal attributes
 When in doubt don’t hire—keep looking
 When you know you need to make a personnel change- do it fast
o In the context of a startup, time is ticking, and you need to get them out fast
MANAGEMENT
 Level 5 Management
o Debate vigorously but once decision is made everyone agrees and moves
forward
 Flywheel and the Doom Loop
o No single defining action that turned company great
o Sustainable pattern of buildup and breakthrough
o Doom Loop is trying to skip ahead and artificial momentum- then
everything falls apart
o Deals are often done because they’re exciting not because they make
sense (inorganic growth = accqusition)
o Should be done ONLY as an accelerator of the flywheel
 Integration is always hard (culture right, incentives right)
EMPLOYMENT AGREEMENTS:
 At-Will vs. Protected
o At-Will can leave anytime and can be fired at any time
o Protected – can only be fired for cause
 If terminated otherwise, employee receives a more significant amount
 Definition of cause one of the most debated provisions
 Termination
19
o Departing with good reason or without good reason
o Good reason- still gets paid severance
 Ex. Demoted, someone was brought in with me, you moved me
SALES STRATEGIES
 Engaging
 Wear multiple hats
 Don’t want to hire someone that’s just there for the paycheck
 Want people who are going to get “something more” out of the experience
o Salespeople with that same team mentality
 “Kiss of death for a startup are people just there picking up paychecks”
 “No limit on the amount of credit you can give people in a business”
PRODUCT
 Good product managers, know the market, know their product, know entire line, and
know the competition extremely well
 Good product managers take responsibility when the product doesn’t preform
 Focus on revenue and customers
 Sales and Marketing = organic growth
 Acquisitions = inorganic growth
FINANCIALS
 Often a tradeoff between revenue and profits
 83% of US listed IPOS were unprofitable for the 12 months leading up to their preview
 Cashflow is absolutely critical
CULTURE
 Culture can change overtime
 Critical to have good corporate culture
 When things are going bad it’s critical to be a good company
 Fox v. Hedgehog from reading
 Diversity from the very begining
ETHICS
 Think back to Theranos reading
o “Illegality is bad, lack of any ethics is disgusting”
 There will always be opportunities for a shortcut – don’t cross that line EVER
DAY 9
Simulation: Up Against The Wall
Day 10
20
Canceled
SECTION IV: EXITING THE BUSINESS
#IV
Day 11
EXITING THE BUSINESS
Guest Professor: Mike Labriola (Wilson Sonsini)
*slides from presentation will be sent after class
US Venture Investing and Exit Activity
 Understanding how exit works is essential to your ability to make money
What Do Exits Look Like
 80/20 rule
o 80% M&A
o 20% IPO
 Sale usually in 5-7 years
 IPOs trending towards 8 years
 Frequently sales are less than total capital raised (LIFO)
IPO PROCESS
 Reason people go public
o People need money
o Liquidity- get money after pouring in blood, sweat, and tears
o Market recognition
 Candy Crush example, didn’t need money, needed branding
o Stock becomes acquisition currency (no one wants privately held shares)
o Employee Comp Alternative
o Future access to cap markets
o Perceived stability (stable investment- odds of going down to zero low)
 Risks and Costs
o VERY expensive (lawyers, accounting, bankers)
o Quiet Period (Restricts ability to talk to investors and customers)
o Compliance- SEC + Sarbanes-Oxley
o Quarterly reports – vicious cycle of reporting results
o Loss of control (giving up percentage of company to general public)
o Stockholder activism (groups work to influence companies in good and bad ways.
Ex.- diversity)
o If you don’t get enough attention from analysts it’s hard to be a public co.
 What it takes to Go Public
o “It’s a process”
21

o Realistically takes 2.5 years to do it right
 Starts with culture and ends with compliance
o At the mercy of the market
 “windows” open and close quickly
 “hot” companies and markers of success change/move
o Have to be be one of the top companies in your market
 Unique, huge market, growing fast, factors to operate as a public co
Timeline
o See table in slides that will be sent after class (slide 18)
M&A Alternative
 Reason people merge/sell to acquirer
o People need money
o Can’t feed your family with your stock
o Liquidity- get money after pouring in blood, sweat, and tears
o Way to further founder’s vision- take it a step further
o Market power or presence
o Avoiding SEC compliance for IPO
 Risks and Costs
o “Everyone you deal with has a day job – no one you deal with has the job title of
Sell The Company”
o Disruption of business
o Confidentiality
 Not telling employees because worried about moral
o Substantial costs and negotiation time
o Loss of Control
 Many founders don’t like giving up companies
o Potential to be left at alter
 No one wants to buy the car the last guy didn’t want
 May lead to missing their “window”
o Acquirer’s stock performance risk - your investment may dry up
 Taking your value and tying it to something much bigger and out of your
control
o Liquidation preferences and carve-outs
 Legal issues- tension between ability to pay investors but possibility of
eventually being about to increase value for common stock holders
 Carve-out: we’re going to give the preference x-million but we’re also
going to give something to common stock holders
 “Just the beginning of the next negotiation”
o Escrows (middle ground taking part of the proceeds in a neutral 3rd party bank
account  if buyer find problem they can go to escrow agent and tell the
problem)typical size is 10%-20% with 1-2 yr duration often CAP on liability ,
o Indemnities (if it’s not what you paid for, I will make you whole),
22


o Earn-outs (for business that still hasn’t proven itself – buyer gets more certainty
and seller taking a bit of a gamble that business will actually be successful)
 Fundamental principal of M&A
 Anytime you do a transaction two competing tensions
o Buyer - certainty of asset- want to know what they’re
getting, as many guarantees that they are getting what
they paid for
o Seller- certainty of proceeds & closure
o Failure to integrate and execute successfully
Timing Factors
o Competitive threats
o Market consolidation/hard time finding a buyer  you could be left without a
dance partner
o Want to sell when solid performing
o Potential to step up a level in combined company
o Non-receptive IPO market
o Antitrust, CFIUS and others
 Regulations like you have to tell gov’t THEN wait 30 Days before you can
do the deal
 CFIUS-committee for foreign investment in the US
 Originally designed for national security
 Great place for “boogieman stories”
Sale Process
o Lots of things can go wrong during sale process
o Deal doesn’t end until $$ is wired
o Role of professional Advisors (bankers & lawyers)
 Good cop, bad cop dynamic
 So someone can throw a fit
 Important for the technical advice
 Keep ears open – link the business to the deal
 ASK- why are they doing this deal, what are they looking for
 What they do
 Bankers – determine valuation, some of the sales guys, some of
the best negotiators (comes from eco system of being bankers)
 Lawyers—advocates of the company, sometimes “scribes” writing
the deal, preparation of Sales Materials
 Accountants – a lot of what you need to produce in a sale is from
accounting dept
o PROCESS (slides 26-27)
 Prep Sales Materials
 Evaluation Period
 Bid Process
23

In the end: (Exclusivity but usually a clause that says “if someone
comes unsolicited and goes higher you can break exclusivity)
 Document Stage
 Where lawyers really come in
 Figuring out what to do with key execs  motivating KEY
employees critical (can’t force someone to stay, and can’t force
someone not to work if they don’t stay)
 Approvals (Board consent, SH approval, etc.)
 Closing
 After all regulatory/gov’t approval
o Structure (see slide 28-)
 Asset Purchase
 Bad new is seller is stuck with the liability
 Stock Purchase
 Buyer taking whole business- getting assets and liabilities
 Reverse Triangular Merger
 Buyer
 Subsidiary of buyer
 Merge target into subsidiary
 All stockholders now own subsidiary
o Typical Merger Agreement Elements (official names on slide 31)
 ARTICLES
I.
What we’re going to do
II.
How we’re going to sell, conditions (financing
III.
Representations of the target co. (certainty of assets- if the things
we promise are true are not true  we will pay you) heavily
negotiated
IV.
Representations of buyer (sometimes buyer needs to rep that
they have the $ and authority to do the deal, nature of stock if
stock is being used to purchase
V.
Between sign and close what you can and can’t do
VI. Extension of exclusivity agreement- (whether you can entertain a
new better deal)
VII.
Supporting agreements (commercial arrangement on the side)
VIII.
Under these circumstances THEN either party can decide to
unilaterally terminate the deal (there is a penalty)
IX. Big big debate (back to certainty of asset negotiation) rule of road
saying how you get paid if something is broken in the company
(current move toward insurance for M&A deals)
X.
When you merge out everyone is gone (paid-out) so who’s the
advocate for the stock holder
XI. Self-explanatory
XII.
Self-explanatory
24

OTHER ISSUES (more detail slide 33)
o Securities Law considerations
 Issuances exemption
 Resale exemption
o Purchase Price
o Employee Matters
 A lot of employees have stock options, so treatment of share options
 May cost employees $$$ to get stock option they can’t afford
 Most stock options are vesting (will you accelerate? Even though it’s
taking money from your stock holders)
o Selected Closing Conditions
 “SEC sufficient financial statements
 EE retention
 Key EE’s
 Aggregate ee base
 Legal opinion – is the deal valid?
o Transaction Expenses
 Big debate who pays
 Sometimes as the seller you can force the buyer to pay
 If you have everyone pay the same way it incentivizes everyone to be
efficient
SELECT M&A ISSUES
o The Board Process and Role
o Duty of care
o Duty of loyalty
 Interesting dynamic
 Can’t be indemnified for duty of loyalty
o Make sure you establish a record that everything was done with due care,
business judgement rule (make sure things are fair)
o Shopping the Company
o Goes hand in hand with board process
o Change of Control Acceleration
o “upon a change of control my vesting accelerates”
o Often for EE’s usually don’t go with company (finance, legal)
o Earn-outs
o If there is a difference in valuation, earn-outs a tool to bridge that gap
o Can do it off milestones, revenue metrics, usually treated as comp as far as tax
considerations (capital gains ½ tax of comp)
Fogel’s EXITING THE BUSINESS
Day 12
Business Exit Overview
25
•Why pursue an exit?
 1) Founders get paid
 2) Investors get paid
 3) Scale the Business- Reached peak growth on your own and you don’t have
the resources to do it
 4) Some may not want to exit- law firm, generational family business
 5) TAX- in tax world you’re paying normal income tax rates (40%) instead of
capital gains taxes from selling (20%)
•Why is “monetization” a better word?
 In most situations you are likely to stay-on to help with transitions
o Strategic Buyers
 Most likely to stay on for 2-3 more years
o Financial Buyer
 Ex. Private Equity firms
 Some “roll” Equity into new company
Business Exit — Different Types
 Bankruptcy
 Sale
o Pro
 Less regulation
 Immediate liquidity (if you sell for cash)
 Long term focus vs. short term focus
 Macro Market issues are less if you’re a private company
 IPO — how it works and challenges.
o You’ve got to stay for awhile
 You can’t leave right away because bankers are selling you and
your company to the public
 You get “restricted stock” that you cannot sell
 Public perception if you walk away / try to sell your stock will be
“if insider is selling, I need to sell”
 Diversifies your investor base
o Pros
 Might want capital for acquisitions
 Might not want to take out loans (interest rates
 Market recognition
 Candy Crush example, didn’t need money, needed branding
 Public Market Premium *debatable
 All things equal- the public company makes more money
(is valued higher because they are public)
 Preferred Stock Rights
o If you go public all preferred stock rights go away
o From a founder’s perspective it’s a pro
o Risks and Costs
26




Compliance- SEC + Sarbanes-Oxley
 Regulatory mess (cost and time spent complying with
regulations)
 Short term emphasis of a public company (obsession with quarterly
estimates – game on Wall Street and a lot of time spent preoccupied
with estimates and forget about long term growth.
 VERY expensive (lawyers, accounting, bankers)
 Other people making money (sell your shares to bank for $14Bank sells to public at $18)
 Limited Liquidity
 You can’t sell your shares for at least 6 months
 Subject to Macro-Market conditions
 IPO windows can narrow or completely close for years at a time
 Quiet Period (Restricts ability to talk to investors and customers)
 Quarterly reports – vicious cycle of reporting results
 Loss of control (giving up percentage of company to general public)
 Stockholder activism (groups work to influence companies in good
and bad ways. Ex.- diversity)
 If you don’t get enough attention from analysts it’s hard to be a public
co.
Strategic vs. financial buyers.
o Strategic
o Financial
 Going to have founders roll their equity- and we’ll all make a ton
of money in a few years when we sell
 DF buys P’s company for $50M sells for $100M makes $50M
 Financial buyer uses financial leverage not out-of-pocket
o DF pays $20M out of pocket, borrows $30M gives
$50M
o Knew borrowing $30M and paying interest on the
cash flow of the business he now owns.
o 5 years later $30M is only $15M selling for $100M
 NET $85M
 If no debt paid off- Net $70M
Majority vs. minority sales.
o In readings
Typical Merger Agreement Elements (official names on slide 31)
o Reps and Warranties – way to disclose (more from seller to buyer)
things about your company that the other party needs to know
 Duly organized in all the operational areas
 Financial Statements accurate
 Clear and free title
 Environmental Issues
 Paid all your taxes
27
o Indemnification Provisions—if you didn’t accurately disclose reps and
warranties you need to pay me later
o Disclosure schedule
 “I’m on the hook for anything that I don’t disclose right now
except for Appendix XXX (disclosure Schedule)”
o Escrow—special kind of account where part of money from purchase is
set aside for a period of time incase legitimate claim raised that a rep was
wrong (middle ground taking part of the proceeds in a neutral 3rd party bank
account  if buyer find problem they can go to escrow agent and tell the
problem)typical size is 10%-20% with 1-2 yr duration often CAP on liability ,
o
Business Exit Process:
 #1 Preparation of sale materials ( DECK + TEASER)
o PowerPoint deck that summarizes the business
o Marketing document- puts companies in best light, gives all the growth
opportunities
o Teaser- highlights opportunities that you send to potential buyers
 #2 Evaluation Period
o Bankers send teaser out  people express interest & want to see the
book  bankers say great you have to sign a NDA  they sign and get
the book out
o Virtual data room is set up- financial documents
o Maybe prospective buyers are allowed to ask questions
 #3 Bid Process
o A lot going on, bankers selling like crazy
o Eventually select few submit a Letter of Intent
 Valuation Range (willing to pay $40-60M)
 Deal Structure Asset Purchase -or- Equity Purchase (Stock/Merger)
 Payment type?
 Financing Structure
 Employment terms for key employees
 Expected Timing
 Plans for Business
o Letters come in- you pick and choose
 #4 Document Stage (Exclusivity agreement here)
o Negotiate the Principal Document Agreement
 Asset Purchase Agreement
 Equity Purchase
 Stock Purchase
 Merger
o Don’t need to know the types of mergers
 Due diligence.
 •Management meetings with prospective
 buyers.
 •Final bids and document negotiations.
28

•Role of investment bankers and legal counsel.

BUSINESS EXIT- KEY TERMS:
•Form - Merger vs. stock sale vs. asset
purchase.
•Stock vs. cash consideration.
•IP assignment/transfer
•Representations, warranties, and conditions.
•Indemnities and escrow.
•Seller financing for small businesses.
•Employment issues and non-competes.
•Purchase price adjustments and earn-outs.
•Tax Considerations.
ASSET PURCHASE
Liabilities
Buyer picks and
chooses what assets
he’s buying and what
liabilities he’s
assuming (BUYERS
LOVE ASSET
PURCHASES)
SH Approvals
Easiest- Don’t need
to run around and
get shareholders to
approve
rd
3 Party Approvals Company X now sells
(Most vendors have its assets to Company
Assignment Approval Y…Company Y now
Agreements)
needs approval for
assigning all
contracts
Have to get the
consent of everyone
EQUITY PURCHASE
STOCK
MERGER
Getting all the assets Getting all the assets
and all the liabilities
and all the liabilities
(GOOD FOR SELLER)
(GOOD FOR SELLER)
Hardest- All selling
shareholders need to
approve
Medium- Generally
requires the majority
of shareholders to
approve
Because you’re
selling all the stockthe company stays in
place. Company X is
still the party.
BUT some have
change in control
triggers- if control
changes you need to
get my consent to
continue the
relationship/contract
29
Taxes
Double Taxed- entity Seller doesn’t have to Seller doesn’t have to
tax & income tax (
worry about double
worry about double
Seller doesn’t like
tax
tax
this) When company
is selling just asset-if
there is profit- the
company pays tax on
the profit THEN when
money goes to
shareholders taxed
again. HOWEVER
gain can be offset by
losses from prior
years so the taxable
event is taxed 0 for
entity.
For each asset there
is a price the selling
company paid to
make them or
acquire them  now
selling for a big
premium. This
makes a step up in
basis.
BUT Seller isn’t
stupid and knows the
buyer likes it so they
req. Buyer to
effectively give them
some of the tax
benefits through an
increased purchase
process
Few More Small Points:
 Purchase Price Adjustment
o Let’s see how many clients/customers came over
o Purchase price is set at $X subject to amount of clients who move over
 Earn Out
o B pays $15M out of pocket but gives S the ability to sell the company
$30M at another time (so B pays $15M more)
30
o Vs. paying $20M now total
READINGS FROM THIS SECTION:
-Bagley, Constance E. and Dauchy, Craig E. The Entrepreneur’s guide to Business Law(pp. 628-679).
Skim also pp. 689-694.
-Blumberg, Matt. Startup CEO(Read Foreword and pp. 355-358)
-“Silicon Valley Startups Favor IPOs Over Deals as M&A Languishes,” Bloomberg:
https://www.bloomberg.com/news/articles/2017-03-28/silicon-valley-startups-favor-ipos-over-deals-as-ma-languishes
-Supplemental Readings 11: Musing of a VC Timing
-Supplemental Readings 12: Being Public Pros and Cons
-“How Spotify's direct listing is different from an IPO,” CNBC.com, https://www.cnbc.com/2018/04/03/howdoes-spotify-direct-listing-work.html

In a traditional initial public offering, banks underwrite the offering, meaning they set an
offering price, and buy or sell shares during the initial selling to keep prices from being too
volatile. But Spotify's direct listing — unusual enough on its own — is further different because
the company is both direct listing and offering shares for the first time without the banks'
underwriting assistance. (Didn’t need or want to raise capital- wanted their employees,
investors, etc. to have the ability to sell their shares over time)




-Bagley, Constance E. and Dauchy, Craig E. The Entrepreneur’s guide to Business Law(pp. 679-689)
.-“How To Negotiate A Business Acquisition Letter Of Intent,” Forbes:
https://www.forbes.com/sites/allbusiness/2015/07/30/how-to-negotiate-a-business-acquisition-letterof-intent/#447bcd7a1b2a
-Bagley, Constance E. and Dauchy, Craig E. The Entrepreneur’s guide to Business Law(pp. 679-689)
.-“How To Negotiate A Business Acquisition Letter Of Intent,” Forbes:
https://www.forbes.com/sites/allbusiness/2015/07/30/how-to-negotiate-a-business-acquisition-letterof-intent/#447bcd7a1b2a

Forming a legal entity
 Make sure you have a good lawyer who understands this stuff!
 Sole Proprietorship
o Simple
o Entity in-that its yourself
o Recording financials through your tax-return
o No limited liability
 Corporation
o BEST ADVANTAGE- Limited Liability
o Long history of established law
o Legally very rigid- have to follow the corporate form
31


 If you don’t corporate veil may be pierced
o Double taxation- what goes on inside corp is taxed and then if you want to get
money out of Corp you distribute it up to shareholders via dividend that gets
taxed too
Partnership
o General partner is liable for all the debts
o Limited partner only liable to the extent they invested
 HAS to be passive (no control over business)
o Permeable membrane- inside operations doesn’t get taxed- passed up to
interest holders and taxed
LLC
o Generally the preferable set up
o Limited Liability (benefit like a C-Corp)
o Like a partnership
o Has to file its own tax return if multiple members
o Permeable membrane- inside operations doesn’t get taxed- passed up to
interest holders and taxed
o VC funds don’t like investing in pass-through entities (they like to invest in a
closed vehicle so that nothing that happens inside goes up to affect institutional
investors)
o SO if you think you’ll need to raise professional money- be a corporation
32