Sunday, January 13, 2008

Get That Contract Signed! ASAP! (Part 1)

Practice what you preach. A well known cliche and one that certainly rings true in our latest dealings in startup world. We've had quite a few people - both those who are friends and those who aren't, who have been providing us with work, advice, etc. Since we only incorporated very recently, we have just started going through our contract negotiations with people. We learned the hard way that it's better to make deals ahead of time. While we dealt with the issues of our engineers in previous posts, the most recent issues have dealt with others involved in our product. One thing I can't express enough is that it becomes very real when contracts are put on the table.

The most recent deal has revolved around open dialog and trust between parties. It's during these discussion that we have found that people's feelings get heavily involved in their negotiations. We try to explain the importance of protecting the interests of our company - and though it's nice in theory to say things will get taken care of, for us, we don't want to risk future litigation, ownership, or the well being of the company. The most recent and high profile of these lawsuits deals with Facebook (here).

Although it's painful to be unable to see eye to eye with people concerning contract disputes - it's important to get contracts in place before you proceed with having people work on your business. Make sure you have this stuff taken care of up front. If I could point to the one piece of starting this company that has been the most difficult, it has been dealing with this issue. We have to part ways with several people already. But we're not willing to concede the well being of our company, our business model, or our integrity in succumbing to unrealistic demands. I've heard too many times how this has come back to bite people in the ass.

Sunday, January 6, 2008

United Airlines - Flying the Friendly Skies? I think not.

I've promised to write about my take on different companies once in a while. Today, I felt the need to talk about United Airlines. These won't all be critical assessments, but today's is. I've been an avid American Airlines and United Airlines customer for the past 10 years. They were the two airlines that flew direct from SFO to Boston (home), which was the primary reason. I was happy though with their service. I then got their credit cards. A United and an American card. It was great, I'd rack up miles, either flying or buying. I was always content. And I was loyal. Until three things happened.

The first was flying Japan Airlines (JAL). I would never look at flying the same way again. I was overwhelmed, to say the least, at how incredible the service was. Their flight attendants were so incredibly friendly, they almost killed me with kindness. As I slept, I awoke to find me covered with a blanket and a note on the seat in front of me that said to call them over when I was ready for my meal. A flight attendant also sat down next to me, for more than an hour, and gave me tips and advice for places to go and things to do in Tokyo. Along with maps drawn out on napkins. Who does that? I've since flown JAL numerous times and have been delighted every time. I'd also like to point out that I've had this same level of service on many other airlines: Thai Airways, Emirates, Cathay Pacific, Druk Air, Bangkok, ANA, Swiss Air, and Singapore Airlines. Get out and travel - it opens your eyes up - to a lot more than different airlines.

The second reason. Customer service. I've had a few disagreements with United over the years and I was recently stung at how little they cared about their customer. I was literally yelled at, at the counter. It was a problem they had made, and though I was visibly upset, I became more upset at how they treated me - and at the additional several hundred dollars in charges that occurred on the flight. I followed up with United and told them about the problem I had. What did they do? They offered a $75 voucher on United Airlines. Some people may think it's a nice gesture, but here's what a $75 voucher costs United. $0. Here's what their mistake had cost me: $275.00. Here's what I would gain from a $100 voucher - more headaches since it's pretty much limited to full fare flights - so it probably wouldn't save me anything. Here's what United gains: whatever the flight costs above $100.

The third reason. I was at the airport last weekend. I was seeing a friend off on her flight. The line at the ticket counter (NOT security), stretched outside of the maze, down the corridor, and around the corner. I had never seen a line so long - but for the past few trips with United, the lines have been extraordinarily long. After business school - I learned that operational planning can prevent problems like this. Or at least help. Their solution? People would wait in line for hours. When they got near the front, a person would call their flight, and move them to a different line to expedite them because their flights were leaving. If I did this again, I'd just come to the airport late and wait for them to call the people on my flight, then I'd check in. Anyway, my friend got through security and wasn't given a seat. Her flight had been oversold. They then moved her to another gate. They finally got her on. She sat on the plane for 3 hours. This sort of service was typical with United (here). How come companies can't take responsibility? Apologize and fix the problem. End of story. Instead, they're blaming it on the weather - when it appears there are other problems.

Anyway, after my problems with United last year - I canceled my United credit card and stopped flying United, unless it was absolutely necessary. My friend just emailed me and told me she's never flying United again. I've heard that story again and again. Reminds me of my Dell story. Customers. Treat them well and they'll treat you well.

I just did a search for "United Airlines sucks" on Google - there are some pretty funny stories. Read up.

Wednesday, January 2, 2008

Being Fair - Employee Compensation (Equity)

Well, we learned something the hard way. We learned that people often have widely varying opinions of what's fair, to the point where it can cause irreparable damage to a business. Fortunately for us, it didn't get to that point.

Let's start with a little background. I am a software engineer. Or I was. Until I went back to business school. When I started this company, programming was the last thing I wanted to do. I wanted to run the business. So we brought 3 friends into the mix to help us develop the software. And so, the adventure began.

From the beginning we declared that they would be treated fairly when it came time to determine the equity split. What we didn't know was what the equity stakes would look like. This was our first time doing this, so we looked everywhere for help. We found some basic guidelines from people we spoke to: CEO's 6-8%, other executives, 4-6%, etc. The consensus was that engineers would make something close to ~1%. This baseline was confirmed when we met with our attorneys, whom have been advising us along the way - and have advised countless tech startups. It's also important to keep in mind that these 3 engineers were taking very little risk. They were all working other jobs and were spending a few hours a day working on developing the site for us. They weren't involved in building the business or any other component.

My partner and I felt that offering the 3 engineers somewhere in the range of what 1 full time engineer would get was an adequate starting point. This process is normally a negotiation, or so we thought.

The morning after I sent out the offer letters, my partner told me he had spoken with 2 of the engineers who were visibly upset. They were so insulted by the offer that they wouldn't even negotiate. They were done. They pulled up their stakes and stopped working. I was a bit surprised to say the least. I got in touch with them later that day to explain the circumstances of the offer and why we felt that it was fair - which I still, to this day feel. We made the decision based on commitment, value to the company, risk, quality of work delivered, our relationship, etc. It wasn't an easy process - but it was one that we had thought out thoroughly.

They responded that it was insulting - that we shouldn't look at the book when working with friends (in determining equity). They had the impression that their contribution should be worth many millions more than what their equity stake suggested upon an exit. It was at this point that I began to feel good about the situation. It was obvious that they hadn't done this before and didn't really have in interest in being part of a startup - all they cared about was the compensation.

Part of the explanation that I gave them was the need to be conscious of the well being of the company and the fact that investors would look unfavorably upon a company that compensated their part time engineers with 1/10th of the company. I also highlighted our need to keep enough equity to continue to hire and grow. I also tried to point out the value of the experience and the many other benefits to working with your friends - such as being able to come on board full time upon financing, getting a great position in the company, learning how to start a company, playing a role in strategy, etc.

In the end, it was all about the money. And though it was an uneasy separation, it was for the best in the long run. We can't and won't use anything they created up to this point, but we thanked them for their time and cut our ties. We still do remain friends though as we've chalked this all up to experience.

As for that 3rd engineer? Well, he's happy with the equity he was offered. He believes in the company and in the founders and is excited to be a part of something that could be very successful. That's how it should work.

What does this all mean to me now? Well, I've strapped on my development hat and started coding again. Not what I envisioned or really wanted - but I think it's best for the company. It's always good to have a developer as a co-founder. And I'm actually a bit excited to get coding again - strange as that sounds, even to me.

The big lesson: make sure that the ideas of fairness are aligned between you and whomever you're talking to. We obviously had very very different ideas of what type of compensation would be fair. But remember, as an employee, it's not all about the money. There's more involved - startups are a great experience. I'm not sure I could ever go back to the corporate world now - it's just no fun!

For the record, I was given < 1% at the last startup I worked, where I coded many 18 hour days, worked without a salary for many months, slept at the office, and was friends with the co-founders. I didn't love the deal - but it was acceptable. And now that I can see it from the other side, it was certainly fair too.

Tuesday, January 1, 2008

Incubators: NetService Ventures Group (4/3)

Ok, so there's an additional section in my incubation series. It's the road that I decided to take with Vyoo. I've found that there are a variety of VC firms or other companies in the valley that offer incubation services to entrepreneurs for different reasons. These reasons vary widely from an interest in the team to an interest in the technology - or some combination of the two. In addition to incubating companies, some of these firms will actually hire entrepreneurs to be "entrepreneurs in residence". These entrepreneurs in residence are employed by the firm but either work on their own projects or find startups to spend time working with - in the hopes that something comes from the relationship.

I met with NetService Ventures Group (NSVG) several months ago, who, for the record, are not considered VC's, but more seed based investors. A good friend from Haas was working there (in a role much like an entrepreneur in residence), and he setup a meeting with the partners. We had a great meeting about both my company and what NSVG was working on at the time. As it turns out, the problem that I am attacking with Vyoo is a problem that NSV is currently working on solving. Although they didn't necessarily think that my solution was THE solution, they were happy that I was attacking the problem from a different perspective than the ones they were taking. From their point of view, having me around would both benefit my company and its growth and benefit their other portfolio companies by providing tactical discussions and different ideas.

In the end, the deal that was worked out with NSVG was in the best interests of Vyoo. I am considered a "friend of the firm"... or part of the Wolfpack as they call it. They have given me office space in exchange for nothing. Yup, nothing. What NSV gets out of it is a close working relationship with me and my company. As I move towards funding, the understanding is that NSVG will be able to participate in the event they choose too. I felt that this was in the best interests of everyone and it leaves both firms in a great position. If things don't work out - NSVG doesn't lose anything. Vyoo has an incredibly small footprint at this point, consisting of office space and a few cans of soda a day.

I've already begun helping some of the associates with developing technology for their portfolio companies. I really can't think of a better relationship and I think this will help us both out in the long term.

The relationship is certainly unique in that it's built entirely on trust. I'm hopeful that this relationship will prove valuable over the long run. I'm not ignorant of the fact that it's important to be careful of relationships like this. It's not always in the best interests of both parties - and not having contracts in advance can always potentially raise concerns. Fortunately, I know the people at NSVG well and I'm optimistic. My next post though will highlight the problems when two parties have different perspectives on what's fair. Vyoo learned that the hard way.